The cost of employee benefits
For years, the cost of health insurance blocked the view of the horizon. Many businesses and public organizations focused on managing annual double-digit growth for health care premiums. The new health care legislation is very complicated and has created even more uncertainty predicting future health insurance costs.
A new monster approached almost unnoticed as we were waging a battle with rising health care costs — underfunded pension funds. Defined benefit plans that are often tied to the market indicators have lost billons with the market decline. Higher contributions are needed to keep plans solvent. Such contributions must come from the employee or the employer, usually some combination of the two.
Teachers belong to the Missouri Public School Retirement System. Teachers are provided retirement options upon reaching various levels of service. Teachers do not pay into Social Security and are not eligible for benefits besides Medicare. In 2003, teachers contributed 10.5 percent of their compensation to the retirement fund. The Board of Education matches the teachers’ contribution. Today, teachers provide 14 percent to the system with the board matching the contributions. Analysts predict that the contribution rate for both parties will need to rise greater than 20 percent in the future to have a fully funded plan.
An average teacher in Columbia earns about $46,000 per year. Thus, in today’s dollars, a 20 percent retirement contribution would decrease the gross pay by $9,200. The board’s contribution of $9,200 per year plus the board paid insurance benefit of $5,500 would equal $14,700, or 32 percent of base compensation. The same calculation projected for a non-teacher earning $25,000 per year would be $9,000 for retirement, Social Security and health benefits. This equates to 36 percent of base compensation.
The same scenario is being played out for public employee groups, private business and universities. Most retirement systems had based predicted financial need on the assumption of an 8 percent growth in the market. The rapid market decline paired with the projected slow recovery has changed the assumption considerably.
How will this dilemma be managed?
First, it will take several years to determine the cost of the new health care legislation. Such uncertainly will likely lead to budgets that build risk into the balance sheets. This, in turn, will reduce funds available to salary.
Secondly, retirement programs will move toward longer vesting periods, and some will continue to increase employee contribution rates. Defined contribution plans will begin to replace defined benefits plans.
Thirdly, individual retirement options will be an increasingly important part of retirement planning.
Finally, the use of the word salary as an employment term will change to total compensation. A company’s benefits package will become more competitive than base salary in some arenas.
As these changes occur, more responsibility will be put on the employee to understand and manage benefits. Health Savings Accounts, 401k, 403b, 457, IRA and other such acronyms will need to be a part of all employees’ vocabularies.