Retirement: Health Care Costs Are Reducing Benefits

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If you feel like your employer’s retirement plan has been getting stingier and stingier you’re right. One big culprit: Soaring health care costs that have been eating up a bigger and bigger share of companies’ benefits budgets, leaving little left over for retirement.

In all, employers have actually been spending more on benefits, at least relative to base pay, than they did half a generation ago, according to Willis Towers Watson, a consulting company that helps large corporations design benefits packages. As of 2015, total benefits comprised about 18.3% of workers compensation, on average, up from 14.8% in 2001.

But there is a big catch: That growth is almost entirely due to health care, and workers’ retirements are suffering as a result. “Health care benefits are eating up a larger portion of dollars while the amount spent on retirement programs is on the decline,” says Willis Towers Watson Managing Director John Bremen.

Employers’ health care spending more than doubled to 11.5% of worker pay in 2015, from just 5.7% in 2001, Willis Towers Watson found. Of course, health care costs have been rising for a host of reasons — with everything from soaring prescription drug costs to hospitals’ so-called fee-for-service business models, all sharing the blame. While it’s tempting to blame Obamacare, at least from an employers perspective, the biggest increase actually occurred between 2001 and 2008, when spending jumped 3.4 percentage points to 9.1% of employees’ total pay from 5.7%. Between 2008 and 2015, it climbed only 2.4 percentage points. Obamacare went into effect in 2010.

Whatever the cause, employers appear to be re-directing dollars that might otherwise have been earmarked for workers retirements. While spending on 401(k)s and other defined contribution plans has ticked up — to 5.7% from 4.1%, that’s largely a result of employers freezing or eliminating more generous pensions to save money. Indeed, defined-benefit spending declined, to 0.9% from 3.8%, more than offsetting any extra contributions to workers’ 401(k)s.

In total, spending on retirement benefits is down by about one fourth since 2001, to 6.8% of pay from from 9.1%.

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Retirement: Health Care Costs Are Reducing Benefits

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