The Milken Institute Review
AvERAGE ANNuAL CHANGE IN HouRLy HEALTH bENEFIT CoSTS, FuLL-TImE woRkERS
source: Watson Wyatt Worldwide tabulations of the Current Population Survey
EARNINGS DECILE (10=HIGHEST EARNERS)
expected earnings from plan assets, forcing
sponsors to increase contributions. In the late
1990s, assets exceeded liabilities by an average
of one-third in nearly 85 percent of large pri-
vate plans. After the fall, two-thirds of plans
were underfunded by nearly 20 percent.
Note, moreover, that the baby boomers
were inching toward retirement. And the de-
lays in funding in earlier decades (driven by
government incentives) now forced sponsors
into catch-up mode. The pension cost crunch
is likely to get even worse before it gets better
because of declines in fund portfolios during
the 2008-9 financial crisis.
There are lessons here, albeit painful ones.
It has retaught plan sponsors that the seem-
ingly attractive alternatives to slow and steady
accumulation can have unintended conse-
quences that failure to contribute to plans
on a regular basis can be very costly down the
road. One can hope that it has also taught
workers that the value of financial assets can
go down as well as up, making saving for re-
tirement an exercise in risk management as
well as thrift.
The costs of employer-sponsored health plans
(see the figure above) have grown more rap-
idly than wages or inflation over virtually the
whole period since the end of World War II.
Rapid inflation in health costs during the
1980s led employers to focus on controlling
costs. And during the 1990s, the effort bore
some fruit: the rise of managed care and
health-provider reaction to the Clinton ad-
ministration's attempt to reform the system
slowed the health-cost inflation. Still, benefit
outlays grew by an average of 2.5 percentage
points more per year than inflation for the
bottom two-thirds of the earnings distribu-
tion a period when wages were growing
only about 1 percent annually.
By the end of the 1990s, pent-up public
anger with managed care had led to abandon-
ment of many of the features of these pro-
grams. No surprise, costs escalated and even
faster than the aggregate statistics portrayed
here suggest because rising costs led many
employers to curtail coverage or even to
abandon their plans.
sapping the fruits of
When the costs of employee benefits are
growing more rapidly than total outlays for