GAO: Benefit Cost Hikes In Front of Wage Increases

February 24, 2005 ( - Total benefit cost increases have outpaced total wage hikes in the last four years, presenting many employers a continuing challenge on how to fund the two outlays.

That was one conclusion from a recent study by the Government Accountability Office (GAO), which examined recent benefits trends and the pressures benefits costs placed on American companies.

According to GAO data, the inflation controlled average compensation costs were up 12% between 1991 and 2005 with inflation adjusted total benefits costs growing about 18% during the period as compared to the real wage growth of 10%. Between 1991 and 2002, wage and benefit cost hikes were about the same, but benefit cost increases pulled ahead in 2002, GAO researchers found.

For example, benefits cost increases were ahead of those for wages for employers of both union and nonunion workers, but the increases in average total compensation costs were greater for employers with medium and large establishments, full-time workers, and union workers, the report said.

The study said that the increase in the cost of a total benefits package from 1991 to 2005 was largely made up of increases in the cost of providing health insurance and retirement income. In combination with paid leave, these three items comprised almost 60% of benefit packages, according to the GAO. Paid leave had traditionally been the most costly benefit to employers, but by 2005, the cost of health insurance equaled that item – in part because health insurance costs, adjusted for inflation, grew by 28% since 1991 while the costs for paid leave grew by only 5%, researchers found.

Of the three benefits, retirement income was the least costly, even though it grew by an estimated 47% during the period – largely between 2003 and 2005. In part, this rapid growth occurred because the stock market, bonds, and other investments were not delivering returns that allowed employers to maintain funding levels for defined benefits plans, GAO said. Roughly half of all workers participated in an employer-sponsored retirement plan, and closer to 60% of those who were full-time employees did so.

However, there was a noticeable shift that occurred from defined benefit retirement plans to defined contribution, which moves much of the responsibility for providing for one’s retirement income to the employee, the researchers noted (See Two More Companies Join DB Plan Freezing List ). One expert predicted the eventual termination of defined benefit plans, a freeze or decrease in hybrid plans and a shift towards 401(k) plans, the GAO said.

Some benefit cost increases were greater for certain types of employers and employees. For example, while large establishments saw a 34% increase in health insurance costs between 1991 and 2005, medium-sized establishments saw an increase of 45%.

Another notable trend during the time under review was that some costs have been shifted to employees and they have assumed greater investment risk. Researchers said that between 1996 and 2003, the percentage of employees at establishments that offered health insurance did not change and employers continued to pay approximately the same share of the premium for employee health insurance, but a smaller percentage of employees participated as the real dollar amount of the premiums increased. Employees also got costs shifted to them through increases in their deductibles and co-payments during this time.

With regard to retirement, half of all workers participated in employer-provided retirement plans between 1991 and 2003, but the types of plans shifted more toward defined contribution plans. With regard to paid leave, holidays and vacations were generally available to most workers between 1991 and 2003, but a smaller percentage of workers had access to personal leave and sick leave.

Because of the trends chronicled in the GAO report, researchers said experts noted that rising benefit costs – increases in the cost of health insurance and retirement income – are forcing private employers and their employees to make tradeoffs between wages and benefits. Maintaining health care and pensions is the main priority for workers, according to union representatives, who said that workers are foregoing wage increases in order to maintain benefits.

Experts also told the GAO that benefits costs may prompt more employers to shift some or all of their production activity overseas, and to use more contingent workers. It was also noted that businesses have concerns about their ability to take on long-term liabilities associated with certain benefit packages. The experts, researchers reported, likewise noted that productivity growth is unlikely to support recent rising costs of benefits, and in the absence of any major changes, rising benefit costs are challenging employers’ ability to offer health insurance and retirement income.