Category Archives: Benefits

Employee Contributions to Public Pension Plans

Source: National Association of State Retirement Administrators (NASRA), Issue Brief, February 2015

From the introduction:
Unlike in the private sector, nearly all employees of state and local government are required to share in the cost of their retirement benefit. Employee contributions typically are a percentage of salary as specified in statute. Although investment earnings and employer contributions account for a larger portion of total public pension fund revenues, by providing a reliable and predictable stream of revenue to public pension funds, contributions from employees fill a vital role in financing pension benefits. In the wake of the 2008-09 market decline, employee contribution rates in many states have increased. This issue brief examines employee contribution plan designs, policies and recent trends.

Consumer Assets and Patient Cost Sharing

Source: Gary Claxton, Matthew Rae, and Nirmita Panchal, Kaiser Family Foundation, Issue Brief, February 2015

From the introduction:
Higher cost sharing in private insurance has been credited with helping to slow the growth of health care costs in recent years. Plans with higher deductibles and other point of service costs provide health plan enrollees with incentives to make more cost conscious health care choices. For families with limited resources, however, high cost sharing can be a potential barrier to care and may lead these families to significant financial difficulties. Many current policies expose individual enrollees to thousands of dollars in cost sharing expenses and family expenses can easily top ten thousand dollars when someone becomes seriously ill.

While concerns about cost sharing are not new, the recent coverage expansions under the ACA put a new focus on what it means for coverage to be affordable. The goal of the law was to cover more of the uninsured, many of whom have limited means. The law requires most people to have health insurance, if they can afford to pay the premium, or to pay a penalty. The issue for some families, however, is that the policies with affordable premiums may have cost sharing requirements that would be difficult for them to meet when they access services. Many of the policies in the state and federal marketplaces have significant cost sharing, as do many policies provided to people at work [here]. The ACA provides cost-sharing assistance to some, primarily to those with incomes below 200 percent of poverty purchasing through a state or the federal marketplace (see sidebar). Others potentially face much higher out-of-pocket expenses.

We use information from the 2013 Survey of Consumer Finances to look at how household resources match up against potential cost-sharing requirements. We assume that households pay premiums out of current income, but that they may need to use savings or other assets if they become seriously ill in order to meet the deductible or the out-of-pocket limit under their health insurance policies. We show that many households, in particular those with lower incomes or where someone lacks insurance, have low levels of resources that would make it difficult for them to meet health insurance cost sharing demands.

State and Local Government Spending on Public Employee Retirement Systems

Source: National Association of State Retirement Administrators (NASRA), Issue Brief, February 2015

From the introduction:
State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. On a nationwide basis, pension contributions made by state and local governments account for roughly 3.9 percent of direct general spending. Current pension spending levels, however, vary widely and are sufficient for some entities and insufficient for others.

In the wake of the 2008-09 market decline, nearly every state and many cities have taken steps to improve the financial condition of their retirement plans and to reduce costs although some lawmakers have considered closing existing pension plans to new hires, most determined that this would increase — rather than reduce — costs, particularly in the near-term. Instead, states and cities have made changes to the pension plan by adjusting employee and employer contribution levels, restructuring benefits, or both. Generally, adjustments to pension plans have been proportionate to the plan’s funding condition and the degree of change needed.

Will Switching Government Workers to Account-type Plans Save Taxpayers Money?

Source: Monique Morrissey, Economic Policy Institute, Briefing Paper #390, March 5, 2015

Although benefit cuts, increased employee contributions, and a rebound in stock prices have improved pension fund finances, severe underfunding remains a challenge in places where the problem predated the recession and was the result of lawmakers neglecting to make required contributions over many years.1 This is helping to sustain the idea that we can no longer afford to provide teachers, police, firefighters, and other civil servants with secure defined-benefit pensions.

Earlier would-be reformers pushed for 401(k)-style defined-contribution (DC) plans prevalent in the private sector. But disastrous results in West Virginia, Michigan, and Alaska have shifted attention to “hybrid” plans, such as cash balance plans, that combine elements of defined-benefit and defined-contribution systems. Advocates of these types of plans say they are a compromise between those who want to maintain traditional pension plans and those who push for a transition to a 401(k)-style system. However, DC and hybrid plans, which can collectively be referred to as account-type plans, fail on three important points:
· They do not help states save money. Traditional defined-benefit pensions are more efficient than DC plans and most hybrid plans due to economies of scale, risk pooling, and other factors. Moreover, changing plan type introduces transition costs. Thus, it is not surprising that states that switched to DC and hybrid plans did not save money except to the extent that they simply cut benefits or required workers to contribute more toward their retirement.
· They create more workforce management problems than they solve. For example, many cash balance plans provide the biggest benefits to job leavers, promoting high turnover in public-sector jobs, which require a high level of skill and experience.
· They increase retirement insecurity. Account-type plans introduced around the country threaten the retirement security of young and old alike. While a well-designed hybrid plan could theoretically help younger workers without undermining the retirement security of midcareer and older workers, none of the plans offered in the current political climate has done so.
Press release

DATAWATCH: Collectively Bargained Health Plans: More Comprehensive, Less Cost Sharing Than Employer Plans

Source: Jon R. Gabel, Heidi Whitmore, Jennifer L. Satorius, Jeremy Pickreign, and Sam T. Stromberg, Health Affairs, vol. 34 no. 3, March 2015
(subscription required)

From the abstract:
National statistics on the cost and provisions of collectively bargained health plans show them to have similar single premiums, but lower family premiums, compared to employer-based plans not subject to collective bargaining. Union members contribute 4 percent and 6 percent of the cost of their premiums for single and family coverage, respectively, versus 18 percent and 29 percent for workers in employer-based plans. Cost sharing in collectively bargained plans is considerably less than in employer-based plans; coverage for prescription drugs is similar.

A Closer Look at Total Compensation

Source: Howard Risher, Compensation Benefits Review, Vol. 46 no. 5-6, October/December 2014
(subscription required)

The BLS data show it is a mistake to generalize or to make assumptions. It is also a mistake to rely loosely on averages.

With the cost of benefits now in excess of 40% of base pay—based on misleading averages—market pay analyses that ignore benefits can lead to invalid conclusions. It would be advantageous to assemble better survey data on the prevalence and value of benefits.

A related issue is the pressure to increase the minimum wage. The workers who will be affected by any increase are in many companies the same individuals who are seeing their benefits reduced. The loss of benefits should be factored into future research on comparative income levels.

Finally, when baby boomers retire today, they often can count on the income from a vested defined benefit. Increasingly tomorrow’s retirees will have to rely on the funds in a defined contribution plan. The data suggest many will not have adequate funds to sustain their lifestyle. There will be a growing number who decide they cannot afford to retire. For those in lower job levels their only source of income could be Social Security and typically part-time employment income.

At the macro level, these trends may not be sufficiently material to affect the conclusions from analyses similar to Piketty’s. However, for the micro analyses central to assessing a company’s total compensation levels, the trends are directly relevant.

Financial Wellness Programs to Reduce Employee Stress

Source: Josh Verne, Compensation Benefits Review, Vol. 46 no. 5-6, October/December 2014
(subscription required)

From the abstract:
Employers of all sizes need to make financial wellness a priority in 2015. Over the past couple years, we have seen some really inspiring trends in the areas of physical and mental health. Companies are implementing healthy eating initiatives, allowing fitness breaks, and offering 24-hour mental health hotlines. These programs are gaining popularity as more organizations realize that healthy employees are happier, more productive, and cost less. The remaining and possibly most costly concern is their financial wellness. Both employees and employers realize gains when financial stress is reduced.

De-Risking Pension Plans Revisited – 2015

Source: John G. Kilgour, Compensation Benefits Review, Vol. 46 no. 5-6, October/December 2014
(subscription required)

From the abstract:
The Pension Protection Act of 2006 changed the way in which the value of lump sum distributions is calculated. When the new method was fully implemented in 2012, it triggered a flood of de-risking activity by sponsors of defined benefit pension plans via one-time lump sum distributions, group annuity contracts with insurance companies and liability driven investing. Underlying these developments were a number of economic and demographic factors including a rising equity market, low interest rates, increased Pension Benefit Guaranty Corporation insurance premiums and a declining number of active participants. These forces are still there. Indeed, they have strengthened due to recent legislation (MAP-21 in 2012, BBA in 2013 and HATFA in 2014). In addition, a number of legal questions have been resolved by the Verizon Communications decision of 2014 and new mortality tables have just been published by the Society of Actuaries. The combination of these developments indicate that 2015 will be another big year for pension plan sponsors to transfer pension risk to participants through lump sum distributions and to insurance companies through group annuity contracts.