Benefits in 2020

The future of health and retirement plans presents big challenges for employers and employees.

Employee benefits have been a lose-lose situation for years.

Even as companies have asked workers to absorb a higher percentage of health-care costs; cut benefits for retirees; and shifted away from richer defined-benefit (DB) plans in favor of more-predictable 401(k)s, CFOs have still had to face their corporate boards and explain how — despite all the rejiggering — the increasing cost of benefits continues to erode profitability. And when they return to their offices, they have to listen to a chorus of employee protests.

It’s only going to get worse. At least that’s the outlook of employee-benefits guru Dallas Salisbury. The CEO of the Employee Benefit Research Institute, a well-regarded, nonpartisan think tank in Washington, D.C., paints a bleak picture of the future of employee benefits over the next 15 years.

For starters, cuts to benefits will continue, he says. By 2020, the ranks of the medically uninsured will be much higher. The significance of that date is that by then, Social Security, if let alone, is expected to become cash-flow negative. Employees will have a difficult time retiring, because they haven’t saved enough. Retiree medical coverage, which has been cut in half, will be halved again. And the number of Americans with traditional DB plans, currently at 17 percent, will fall to 8 to 10 percent.

Employers won’t have it any easier. For the most part, they’ll be pulled in opposite directions. Global competition will force companies to continue scaling back to remain viable against rivals from nations without a history of rich benefits, such as China and India.

But at the same time, many companies will be forced to offer generous benefits to at least a portion of the domestic workforce, as a shortage of labor — already seen in some high-end manufacturing and health-sector jobs — intensifies due to demographic trends (see “The Retirement Age“). CFOs will have to stretch benefit dollars further to balance these competing interests.

That balancing act is likely to have three major side effects that could shape the debate on benefits for decades:

1. The shift to defined-contribution health and retirement benefits promotes less-efficient use of resources.

401(k) plans have been the preferred method of providing retirement benefits for years. Now health care, with account-based plans such as health savings accounts and health reimbursement arrangements, is heading in the same direction. The simple truth is that the defined-contribution model weakens the shared-risk aspects of insurance. Taking health-care dollars out of the risk pool and putting them into accounts will shift more of the burden of paying for health onto those who are less healthy. Critics also worry that individuals will be poor purchasers of care on their own and susceptible to scam artists.

On the retirement side, Salisbury points out that 401(k) plans do a poor job of spreading the risk of outliving one’s nest egg. A 401(k) plan participant will likely run out of money if he or she lives to be 100 years old. A traditional pension plan spreads funds more evenly over the average life span of the pool, and the benefits are delivered in annuities, which are generally cheaper.

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