Benefits Growth Outpaces Comp Growth … Maybe

The title to a fresh GAO report carries its key message, Employer Spending on Benefits Has Grown Faster Than Wages, Due Largely to Rising Costs for Health Insurance and Retirement Benefits. [GAO-06-285]

The GAO found that from 1991-2005, inflation-adjusted employer costs of benefits rose about 18 percent, while real wages rose only 10 percent. However, virtually the entire differential emerged during the most recent 3-year period, when wage growth only matched inflation while employers’ costs for benefits continued to rise more; in contrast, from 1991 through 2002, the increase in the costs of benefits and wages were virtually identical.

The GAO attributes most of the increase in benefits costs to health insurance and retirement income, the cost of which comprise almost 60 percent of benefit packages. Paid leave, traditionally the most expensive benefit, yielded first place to health insurance during the study period. Escalation in health care costs was attributed to advances in medical technology, increased utilization of expensive procedures and services, and population aging.

But the element seemingly on steroids – pensions, for which the GAO estimated inflation-adjusted growth at 47 percent during the period – may instead have been viewed somewhat through an amusement park’s funhouse mirror. The GAO acknowledges that most of pensions’ growth in the study came through via defined benefit plans since 2002, which during the preceding several years had suffered devastating returns in the stock market (although the GAO report incorrectly lumps “bonds” into the appraisal of that explanation, and fails to fully recognize that concurrent and lingering declines in interest rates had an even more devastating distortion on the DB side of the picture).

Experts consulted for GAO’s report interpreted the trends as “forcing private employers and their employees to make trade-offs between wages and benefits,” that “workers are foregoing wage increases in order to maintain benefits.” The experts noted the established trend of “shifting toward increasing responsibility and risk to the employee” without explaining how employer costs for benefits had still managed to diverge so much from wages in the face of that cost-shifting. The GAO itself points to another major trend pushing against total compensation growth: “offshoring and using contingent workers (many of whom are not offered benefits).” Absent cuts in retiree health plans, absent major sea changes in health benefits for active workers, absent the global pension ice age forcing employees to lean on defined contribution accounts for retirement dreams, and absent outsourcing, presumably the divergence witnessed by the GAO during the past 3 years would have been far more severe. Even so, the experts warned that productivity growth could not be expected to support continuation of the recent trends in benefit costs, “challenging employers’ ability to offer health insurance and retirement income,” suggesting even further cost-shifting ahead.

Well, maybe. Although tag me unconvinced that these numbers connect very well with those messages. Certainly there is no denying the momentum of globalization, demographics, technology, and sweeping social and financial change, each and altogether leaving permanent marks on compensation and benefits, although the experts’ interpretation of exactly how that all shows itself in the data seems to this observer rather apocryphal on the retrospective side of the picture and somewhat self-serving to the prospective.

For my future fugues file the health care piece of this. Guerre du jour, that bulge that did most to give the GAO report its title: pension “costs” for the past 3 years. So tell me, did that recent huge jump mix cost with contribution? Say, in particular, are we including GM’s $19 billion cash contribution to its pension plans in 2003? and IBM’s $4 billion in 2002? and similar spikes in contributions by most other defined benefit plan sponsors? Because if that’s what we’re looking at, then keep most of the dots on the page, but they don’t connect quite the way the GAO report’s title suggests. Or are we looking at costs as reported on employers’ financial statements, which although not as jagged a trend as contributions, have still risen sharply the past 3 years for related but differently responsive reasons? Even then, the data still does not connect with the title or the message quite the way it is being posed here. Or are we looking at charges for benefits accruing in the current year, as measured by service costs together with some net financing charge for carrying the risk forward toward retirement? I strongly doubt that it, but if we were, then the fingers pointed toward the stock market would be quite badly misdirected.

Am I being unfair if I suspect that the report authors would not be able to settle that starting point out for me? that I need to research it myself by probing back into the BLS data that the report was built on? And shouldn’t I know that fundamental before I doubt the message? Except that under any of the three main lines I’ve postulated here, the report’s title message has to be very heavily qualified, almost to the point of characterizing it as not actually so. And let me get more blunt: pull data that follows something other than contributions, reported costs, or service costs, something that purports to represent the real underlying compensation cost for retirement benefits, and when balanced by the long-term move that has been taking place toward defined contribution plans, then I would not be seeing the graphs that the GAO is drawing.

Then again, I am not one of the GAO’s experts.