Employee Compensation: Employer Spending on Benefits Has Grown Faster Than Wages, Due Largely to Rising Costs for Health Insurance and Retirement Benefits
Published: 2006-02-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Because most workers rely primarily on their employers to provide both wages and benefits as part of a total compensation package, the trends in the costs and availability of employer-sponsored compensation have a significant bearing on workers' well-being. Through tax preferences and payroll taxes, federal government policy also has a bearing on employees' access to benefits and on the costs carried by employers. The federal government provides significant tax subsidies for both health insurance plans and qualified retirement plans. In addition, workers and employers are required to pay taxes that fund Social Security and Medicare, programs intended to help provide for workers' economic security and peace of mind in retirement. In this report, GAO examined federal data on private employers' costs for active workers and sought perspectives from 17 experts to identify (1) recent trends in employers' total compensation costs; (2) composition of the trends; (3) whether employees' costs, participation, or access to benefits changed; and (4) possible implications of the changes for private systems. GAO received technical comments from the Departments of Labor and Health and Human Services and from some of the experts GAO consulted. These comments were incorporated as appropriate.
section_title: What GAO Found
paragraphs: Private employers' average real cost of total compensation (comprising wages and benefits) for current workers grew by 12 percent between 1991 and 2005. The real costs of benefits grew by close to 18 percent, while real wages grew by 10 percent. Wages and benefits increased by about the same percentage for most of the period until 2002, after which time real wages began to stagnate and real benefit costs continued to grow. The increase in the cost of a total benefits package from 1991 to 2005 was largely composed of increases in health insurance and retirement income costs. Paid leave had been the most costly benefit to employers, but by 2005, the cost of health insurance equaled that of paid leave. In comparison to paid leave and health insurance, retirement income was the least costly, but it grew by an estimated 47 percent. During the time under review, employees' access to most benefits remained stable, but participation rates declined for health benefits as the real dollar amount of the premiums increased. Between 1991 and 2003, roughly half of all workers participated in employer-provided retirement plans. Holidays and vacations were generally available to most workers, but a smaller percentage of workers had access to personal and sick leave. A panel of experts from a variety of backgrounds agreed that rising benefit costs are forcing private employers and their employees to make increasingly difficult trade-offs between wages and benefits. They noted that the employer-sponsored system of benefits in its current form may be unsustainable, largely because productivity growth is unlikely to support the rising costs of some benefits, especially escalating health insurance costs.

section_title: Letter
paragraphs: Trends in the costs and availability of employer-sponsored  compensation—wages, health insurance, retirement income, and paid  leave—have a significant bearing on U.S. workers and U.S. industry.  Traditionally, employers used robust compensation packages to attract  and retain talented workers in order to maintain their competitiveness.  However, in today’s changing global environment, some employers are  citing compensation costs as an obstacle to competing against foreign  businesses where the cost of doing business is lower. As a result,  employers, in the absence of sufficient growth in productivity, may alter  compensation packages or ask workers to accept a greater responsibility  for such costs in the future.
Through tax subsidies and payroll taxes, federal government policy also  has a bearing on employees’ access to benefits and on the costs carried by  employers. The federal government provides significant tax subsidies for  both health insurance plans and qualified retirement plans. In offering  these subsidies, the federal government seeks to promote health care and  retirement income for individuals and families. In addition, workers and  employers are required to pay taxes that fund various programs. These  include Social Security and Medicare, programs intended to provide  financial security in retirement, as well as contributions to the  Unemployment Insurance program, which partially replaces income for  workers who are involuntarily unemployed. In this way the private system  of employer sponsored benefits works in tandem with social insurance  programs to promote the well-being of workers and retirees.
Given the significance of employer-sponsored compensation for the U.S.  workforce and the economy, we have examined federal data on employee  compensation for current workers in private industries to identify   (1) recent trends in employers’ total compensation costs—including both  wages and benefits; (2) the composition of these trends; (3) whether  employees’ costs, participation, or access to benefits have changed; and  (4) the possible implications of those changes for private systems.
Specifically, we examined data from two federal surveys: the Bureau of  Labor Statistics’ (BLS) National Compensation Survey (NCS) and the  Agency for Healthcare Research and Quality’s Medical Expenditure Panel  Survey (MEPS). We used NCS data to determine trends in private  employer costs for wages and salaries, total benefits (including those that  employers are legally required to contribute to, such as Social Security),  and specific employer-provided benefits—retirement income, health  insurance, and paid leave—for 1991 through 2005. All data are from the  first quarter of each year. Although employers spend funds on benefits and  may change the benefit package based on cost increases to control  spending, BLS characterizes its survey data as “costs” to employers. As  such, we refer to costs to employers in our analysis. The NCS data reflect  employers’ costs for active employees and do not include costs for  benefits employers may provide to retirees. We also used NCS data to  examine trends in current employee participation in retirement plans and  paid leave between 1990 and 2003.
We used MEPS data to determine for 1996 through 2003 the trends in  current employees’ access to and participation in health insurance  benefits, and the premium cost to private employers and their employees.  We examined cost and participation data in the aggregate and whenever  possible by industry sector (goods-producing and service-providing),  industry type (such as manufacturing), establishment size, workers’ full- time and part-time status, and workers’ union and nonunion status. The  NCS measures costs per employee hour worked, and MEPS measures  costs as an annual average. We report the data as they were measured.  Because the data are for multiple years, we report all costs in 2004 dollars  to adjust for inflation. In reviewing both NCS and MEPS data, we  determined that they were reliable for our purposes.
In addition to examining data, we convened a panel of 17 experts  representing the human resources field, industries, unions, and academia  to discuss the trends in the cost and availability of worker benefits. We  completed our work between May 2005 and December 2005 in accordance  with generally accepted government auditing standards. For additional  discussion of our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Currently, U.S. workers rely primarily on their employers to provide both  wages and benefits (such as paid leave, retirement, and health insurance)  as part of a total compensation package, with wages comprising  approximately 70 percent of total compensation. Of the benefits package  employers provide to employees, almost one-third is mandated by law, and  includes contributions to programs such as Social Security, Medicare,  workers’ compensation, and unemployment insurance, and other  programs. The remaining portion of the benefits package is discretionary  and typically includes paid leave, retirement income, and health  insurance—some of the more costly benefits.
Over the last century, employer-sponsored benefits have become an  increasingly important part of compensating workers. Prior to the turn of  the 20th century, workers relied primarily on their own, their families’, or  the communities’ resources in the event of a health or economic  emergency. With the advent of the industrial revolution in the United  States, unions began to offer disability and death coverage to workers in  order to protect them against workplace risks of factory work. The tight  labor market of World War II, along with Supreme Court rulings and  federal legislation, helped make benefits a legitimate part of collective  bargaining and, in part, fueled the offering of employer-sponsored  benefits.
Outside the benefits that are legally required, those benefits that  employers choose to provide serve a number of purposes. From a business  perspective voluntary benefits assist employers to attract and retain highly  skilled workers. For example, pension plans can be a means of attracting  workers, reducing turnover, and encouraging productivity. Defined benefit  pension plans, which are typically offered as periodic payments over a  specified period beginning at retirement age, can be used to foster a  worker’s long-term commitment to his or her employer. Defined  contribution pension plans, which are individual accounts to which  employers and/or employees make contributions, may be attractive to  employees who desire more portable benefits. In deciding to offer  benefits, companies must assess the nature of their particular workforce  to determine if offering benefits is a necessary employment inducement.
Employers may also choose to sponsor benefit plans because of favorable  federal tax treatment for certain forms of compensation. To encourage  them to establish and maintain pension plans, the federal government  provides preferential tax treatment under the Internal Revenue Code for  plans that meet certain requirements. A purpose of tax preferences for  employer-sponsored pensions is to encourage savings for workers’  retirement. Pension tax preferences are structured to strike a balance  between providing incentives for employers to start and maintain  voluntary, tax-qualified pension plans and ensuring participants receive an  equitable share of the tax-favored benefits. In fiscal year 2004, the federal  government was expected to forgo an estimated $95 billion in federal  income tax revenue due to the tax exclusion for employer-sponsored  pension plans. Tax policies also contain significant tax benefits for  employer-sponsored health insurance and medical care. Most notable, the  tax exclusion for health care permits the value of employer-paid health  insurance premiums to be excluded from employees’ taxable earnings for  income taxes. It also excludes the value of the premiums from the  calculation of Social Security and Medicare payroll taxes for both  employers and employees. The tax exclusion is credited with increasing  health coverage for employees. The risk pooling under group health  insurance allows employees to obtain insurance at lower costs than the  individual insurance market. The federal government was expected to  forgo an estimated $153 billion in taxes in fiscal year 2004 due to the  exclusion of employer contributions for health care.
Recent developments are leading employers to make decisions about the  provision of the employer-based benefits system. An aging population with  longer life expectancies increases the long-term obligations of companies  that provide defined benefit pension plans. Some companies have cited  this obligation as a contributing reason for declaring bankruptcy,  reorganizing, and terminating large plans of this type. Advances in  expensive medical technology, increased use of high-cost services and  procedures, and an aging population have contributed to escalating health  care costs. Advances in other technologies have stepped up competition  from foreign firms by increasing global competition. In response to such  competition, U.S. firms have continued to look for ways to reduce their  costs, such as offshoring and using contingent workers (many of whom  are not offered benefits).
In addition to employer-sponsored benefits, multiple federal programs  supplement workers’ and retirees’ benefits. For example, Social Security  pays monthly cash benefits to more than 36 million eligible retired or  disabled workers. Intended to complement retirement incomes, in many  cases Social Security may provide the only source of such retirement  income. In addition, the federal-state Medicaid program provides health  insurance to certain low-income individuals including older Americans in  need of long-term care who meet financial eligibility and other  requirements. Most recent figures show Medicare provides health  insurance to 35 million individuals age 65 years and more than six million  disabled individuals under age 65.
section_title: Average Compensation Costs Grew by 12 Percent between 1991 and 2005, with Benefits Outgrowing Wages by 8 Percentage Points
paragraphs: Private employers’ average cost of total compensation (comprised of  wages and benefits) for current workers grew by 12 percent between 1991  and 2005, but benefit costs outpaced wages in the most recent years after  controlling for inflation. The increases in average total compensation costs  were greater for employers with medium and large establishments, full- time workers, and union workers, than for those with small  establishments, part-time workers, and nonunion workers. The overall real  costs of benefits grew by 18 percent, while real wages grew by 10 percent.  Benefits represented more than a quarter of total compensation costs.
subsections: section_title: While Growth in Compensation Costs Fluctuated between 1991 and 2005, Average Benefit Cost Increases Had Outgrown Average Wage Increases by the End of the Period
paragraphs: On average, overall employers’ inflation-adjusted cost for total  compensation rose about 12 percent between 1991 and 2005. Both  components of total compensation—wages and benefits—had also grown  after adjusting for inflation, but at different rates. By the end of the period,  the cost of total benefits grew by approximately 18 percent and wages had  increased by 10 percent (see table 1). By 2005, benefits accounted for   29 percent of total compensation while wages made up 71 percent of the  workers’ compensation package.
Across the 15 years under examination, the cost of wages and benefits  generally grew in tandem, albeit at different rates (see fig. 1). The  noteworthy exception was after 2002 when benefit costs continued in a  steep ascent and wages began to flatten, resulting in an almost   8 percentage point difference between the growth rates of the two. The  recent divergence between benefits and wages is not unprecedented; there  was a 6 percentage point difference between wage increases and benefit  cost increases in 1994. However, what makes the divergence between the  growth of wages and benefits after 2002 compelling is that it is preceded  by a steady increase for both. The result, therefore, has been a  significantly larger real dollar cost to employers—roughly $1,000 more per  year in benefit costs for each full-time employee—when comparing 1994 to  2005.
section_title: Increases in the Costs of Benefits Outpaced Wage Growth among All Types of Employers, Although Average Cost Increases Varied
paragraphs: As was the case in the aggregate, by 2005, growth in the real cost of  benefits outpaced the increase in wages for each type of employer (see  table 2). For employers of union workers this effect was even more  pronounced; these employers experienced benefit cost increases greater  than wage increases over most of the time period and saw several years of  no growth in wages. This pattern of benefit growth outpacing wage growth  rates was least pronounced for employers of part-time workers, but still  true. (See app. II, fig. 5 to 13 for all employers.)
While employers uniformly saw average real benefit costs grow more than  average real wages, the overall increase in total compensation varied by  employer type. Employers at medium (100 to 499 workers) and large  establishments (500 or more workers) experienced increases in total  compensation costs of roughly 20 percent. In contrast, small  establishments did not experience statistically significant increases in total  compensation costs. Employers’ total compensation costs for full-time  workers increased by 16 percent as compared with the 13 percent increase  for part-time workers. Employers of unionized workers saw their total  compensation costs grow by 21 percent as compared to the 13 percent  increase experienced by employers of nonunion workers. (See app. II,  tables 8 to 12 for all employers.)
section_title: The Increase in Employers’ Cost of Benefits Was Largely Composed of Increases in the Cost of Health Insurance and Retirement Benefits
paragraphs: The increase in the cost of a total benefits package from 1991 to 2005 was  largely composed of increases in the cost of providing health insurance  and retirement income. Paid leave had traditionally been the most costly  benefit to employers, but by 2005, the cost of health insurance equaled that  of paid leave. Of the three benefits, retirement income was the least costly,  even though it grew by an estimated 47 percent in real terms during the  period, largely between 2004 and 2005.
subsections: section_title: Employers’ Costs for Health Insurance and Retirement Income Increased over 27 Percent between 1991 and 2005
paragraphs: The increase in the real cost of a total benefits package from 1991 to 2005  was largely composed of increases in the real cost of providing health  insurance and retirement income. (See table 3 and fig. 2.) Paid leave had  traditionally been the most costly benefit to employers, but by 2005, the  cost of health insurance equaled that of paid leave. This occurred, in part,  because health insurance costs grew by 28 percent while the costs for paid  leave did not show significant growth during the period under study. Of  the three benefits, retirement income was the least costly, even though it  grew by an estimated 47 percent during the period, largely between 2004  and 2005. In combination with paid leave, these three benefits represented  on average almost 60 percent of an employee’s total benefit package and  over 80 percent of employers’ costs for voluntary benefits.
Expert panelists discussed underlying factors driving trends in real costs  for employer-sponsored benefits from 1991 to 2003. Regarding trends in  retirement income, an expert noted that employers decreased their  contributions to funds for defined benefit plans during the 1990s, which  was reflected in a decrease in employer spending for retirement income.  According to the Bureau of Labor Statistics, defined-benefit pension plan  assets grew rapidly in the middle to late 1990s as the stock market  continued to rise, so employers often did not need to contribute funds to  defined-benefit pension plans. Stock prices generally fell from April 2000  to February 2003, and interest rates on bonds and other investments  remained low, requiring employers to contribute more funding to defined- benefit plans beginning in 2003 to meet minimum funding requirements.  Recent increases in employer costs for retirement benefits can be  attributed to a similar phenomenon. Legislation enacted in 2004—the  Pension Funding Equity Act—provided 2-year relief for businesses,  allowing contributions to be reduced compared to what would have  otherwise been required.
In the case of health care benefits, in addition to increases in the cost of  providing medical services, several factors were noted to drive trends in  employer costs. These include the health insurance underwriting cycle, the  emergence of managed care, competition, and consolidation in the health  care industry. In the underwriting cycle, health insurance companies  forecast premium costs and then set their prices either higher to maximize  profitability or lower to maximize market share. In the early 1990s,  managed care plans lowered their premium prices in order to increase  market share, fueling price competition among health insurance  companies. However, later in the decade, many plans moved away from  tightly managed health care plans. As one expert noted, in the late 1990s,  insurer consolidation and mergers led to a more concentrated industry.  Research in this area suggests that many of the remaining plans shifted  their strategies from gaining market share to improving profitability,  stimulating premium increases and spurring the upward trend in costs for  employers.
section_title: For Most Employers, Retirement Income Showed the Greatest Percentage Increase
paragraphs: Most types of employers experienced the largest percentage increases in  costs for retirement income compared to the growth in costs for health  insurance and paid leave between 1991 and 2005 (see table 4). This was  true for employers whether they had union or nonunion employees, or  whether they employed part-time or full-time workers. Small  establishments were the one exception; health insurance represented their  greatest cost increase. Nevertheless, the real dollar costs for health  insurance and paid leave remained larger than retirement income costs for  all employers. Appendix III, tables 13 to 17 provide real costs for paid  leave, retirement income, and health insurance for each employer  characteristics between 1991 and 2005.
section_title: Employees’ Access to Benefits Remained Generally Stable, but Employees Face Greater Costs and Assume More Investment Risk
paragraphs: During the time under review, employees’ access to benefits has remained  stable, but participation rates declined for health benefits, some costs have  shifted to employees, and they have assumed more investment risk.  Between 1996 and 2003, the percentage of employees at establishments  that offered health insurance did not change. Also, employers continued to  pay approximately the same share of the premium for employee health  insurance, but a smaller percentage of employees participated as the real  dollar amount of the premiums increased. Some employees also saw  increases in their deductibles and co-payments during this time, according  to the expert panelists we convened. With regard to retirement income,  half of all workers participated in employer-provided retirement plans  between 1991 and 2003, but the types of plans shifted more toward defined  contribution plans, under which employees assume the investment risk.  With regard to paid leave, holidays and vacations were generally available  to all workers between 1990 and 2003, but a smaller percentage of workers  had access to personal leave and sick leave.
subsections: section_title: The Share of Health Care Premiums Paid by Employees and Employers Remained Relatively Stable, but Employee Participation Declined
paragraphs: Data presented on premiums, the percentage of workers at establishments offering health  insurance, the percentage of workers eligible for health insurance at firms offering the  benefit, and the percentage of eligible workers who enroll in the benefit are from the  Medical Expenditure Panel Survey-Insurance Component (MEPS IC) and represent the  years 1996 to 2003. The data used for this analysis did not allow us to assess the adequacy  of coverage, or any change in quality.  (See app. I for more details.)
Premium costs presented here are for single workers coverage. Family coverage  premiums increased by 43 percent between 1996 and 2003—from an annual average of  $6,732 to $9,654. The real premium included both the employee’s and employer’s share. To  control for the effect of inflation in health insurance premiums, dollars are reported in 2004  terms by using the BLS Consumer Price Index for Medical Care. Inflation in medical care  has been great, and using an all items CPI would overstate the growth in premium costs. some employees’ deductibles and co-payments also increased during this  period.
The percentage of establishments offering insurance, the percentage of  employees eligible, and the percentage of eligible employees enrolled  ranged across all types of employers. This suggests that some employees  were more likely to receive employer-sponsored health insurance than  others (see fig. 3). For example, the percentage of employees who worked  at small firms (1 to 9 employees) offering health insurance was 46 percent  compared with 99 percent for those in firms of 1,000 or more employees.  The same was true for the percentage of employees eligible to participate  in the health insurance plans offered by companies. For example, of those  employed part-time, 32 percent were eligible while 89 percent of those  who worked full-time were eligible. This was also the case for  participation among those eligible. For most types of employers, over   75 percent of eligible employees enrolled in the company’s health plan.  This trend was true across firm sizes, for most industries, and union  status. The exception to this trend was in retail where the enrollment rate  was 67 percent and for part-time workers at 48 percent.
The health insurance premium increases seen overall were true for every  type of employer regardless of characteristics, such as firm size or  industry. For each type, the average annual single worker premiums  increased between 1996 and 2003 by at least 24 percent (see fig. 4). By  2003, the average premium ranged between $3,445 and $4,278, after  adjusting for inflation. The mining industry experienced the largest  increase over the time period, while premiums for employers and workers  in the transportation and utilities industry increased the least. Employees’  shares of these premiums ranged between 12 percent and 21 percent. At  the high end of the range were employees in the retail industry, which also  had one of the largest declines in enrollment across the period examined.
section_title: About Half of Employees Had Access to Retirement Income Plans, with a Trend Toward Defined Contribution Plans
paragraphs: Employee participation in retirement plans did not change significantly  between 1990 and 2003. Roughly half of all workers participated in an  employer-sponsored retirement plan, and closer to 60 percent of those  who were full-time employees did so. However, there was a noticeable  shift that occurred from defined benefit retirement plans to defined  contribution plans (see table 5). Employers who sponsor defined benefit  retirement plans agree to make future payments during the employee’s  retirement. To meet this obligation employers are responsible for making  contributions sufficient to fund promised benefits, investing and managing  plan assets, and bearing the investment risk. Under defined contribution  retirement plans, employers may make contributions but have no  obligations regarding the future sufficiency of those funds. Thus, this shift  from defined benefit to defined contribution plans shifts the responsibility  for providing for one’s retirement income to the employee. In addition,  while participation in most defined benefit plans is automatic (depending  on one’s position), many defined contribution plans require employee  contributions before the employer makes a contribution.
section_title: Paid Leave Was Generally Available to All Workers, but Certain Types of Leave Were Less Available to Part-Time Workers
paragraphs: The percentage of employees offered paid leave was relatively stable  between 1990 and 2003. Across the period, three-quarters or more of all  workers were eligible for paid holidays and vacations. Full-time workers  were more likely than part-time workers to be offered employer-sponsored  paid leave (see table 6).
section_title: Experts Agreed That Rising Benefit Costs Are Forcing Private Employers and Their Employees to Make Trade-Offs between Wages and Benefits
paragraphs: Experts who reviewed our data found it reflected their experience and  asserted that rising benefit costs have been leading employers and  employees to make increasingly difficult trade-offs between wages and  benefits. Maintaining health care and pensions is the main priority for  workers, according to union representatives who said that workers are  trading wage increases in order to maintain benefits. A panelist noted that  workers consistently choose to preserve health care benefits over  increases in cash compensation. On the other hand, it was noted by a  small business leader that in his experience some employees, particularly  younger people, prefer to increase wages rather than preserve benefits. A  panelist explained that it is the rise in the actual dollar costs of benefits  that is driving both employer’s and employee’s decisions.
Additionally, our compensation data for the past decade provoked a  number of observations from the panelists regarding the likelihood of  shifting risk to the individual employee. Experts discussed the continuing  shift in employer-sponsored retirement income from defined benefit to  defined contribution plans. One expert predicted the eventual termination  of defined benefit plans, a freeze or decrease in hybrid plans (those that  combine features of defined benefit and defined contribution plans), and a  shift towards 401(k) savings plans (which are a type of defined  contribution plan). Panelists also observed that with regard to health  benefits, employers are experimenting with consumer-directed health care  plans, which may also shift more responsibility and risk to the individual  employee. In addition, employers are considering changing the way they  offer compensation. Experts agreed that there has been a movement from  fixed to incentive compensation, wherein employers tie cash  compensation to productivity. It was noted that some employers are  turning to stock options in lieu of wage increases. Given the risks implied  for the individual in such private sector plans, for both retirement and  health care, a panelist emphasized that employees will need adequate  education to make informed decisions.
Panelists also made observations about the rise in compensation costs and  their current and future implications for business and for employees. One  benefits expert stated that if an employer is locked into paying  compensation costs that the productivity of their workers cannot support,  jobs will go elsewhere. A union representative noted that the garment  industry has faced international competitors with lower compensation  costs, which has led to lowered compensation for U.S. workers and a loss  of domestic jobs. It was noted that employers may attempt to remain  competitive by cutting wages and benefits for workers, offshoring jobs,  and increasing the use of contingent workers, who may not be provided  benefits. It was also noted that businesses have concerns about their  ability to sustain long-term liabilities associated with certain benefit  packages.
Experts disagreed on whether or how much of the responsibility for  addressing the rise in benefit costs should rest with the public sector. In  the view of a union spokesperson, such benefits amount to a social good,  something that supports the well-being and overall productivity of society.  A union representative noted that employees who have dropped out of  health insurance plans, especially employees in lower wage industries,  have subsequently relied on public programs in which taxpayers ultimately  bear the cost. Other panelists expressed belief in the marketplace as an  arbiter of resources and said that government or public benefit models are  not a solution to employers’ rising costs for compensation. These panelists  suggested competition would eventually resolve the distribution of  benefits by winnowing out companies that could not attract the kind of  employees needed with the type of compensation they provide. One  panelist emphasized that government, therefore, should have limited  involvement in the provision of employer-sponsored benefits. A human  resources representative suggested that businesses should be allowed to  experiment with different means of providing benefits. On the other hand,  it was also suggested that future solutions to benefit costs would require  both public and private initiative and collaboration. A union representative  noted that partnerships among employers, workers, and government could  begin to address the problem of rising benefit costs.
Aside from such different viewpoints, most panelists noted that the  employer-sponsored system of benefits in its current form may not be  sustainable, largely because productivity growth is unlikely to support  rising benefit costs. Given the potential for this unsustainability, they  noted that employers and employees will be forced to continue making  trade-offs between wages and benefits.
section_title: Concluding Observations
paragraphs: While public policy has focused on the rise of health care costs as it affects  today’s retirees, it is apparent that these expenses are also having an effect  on current workers and their employers. The growth in real costs is  significant, especially given the decrease in participation among those  eligible. While a number of factors could influence an employee’s decision  not to participate in employer-sponsored benefits, cost is certainly one of  them.
In the United States, retirement income rests on a proverbial “three-legged  stool.” This is income derived from Social Security, employer-sponsored  pension plans, and personal savings—all requiring investment over the  working life of the employee. For pensions, the ongoing shift to defined  contribution plans will require that Americans become far more educated  and resourceful to successfully manage the associated risk. With regard to  defined benefit plans, it will be imperative that they are not underfunded  so that current and future retirees are not put at risk or that taxpayers are  not asked to pay when companies default on their obligations.
Rising health care and retirement costs affect both employers and  employees. Employers may turn to using more contingent workers to  whom they may not need to pay benefits and to a workforce overseas.  From the employees’ perspectives, as the cost of benefits rises, they will  be confronted with continued trade-offs in their compensation packages.
For the nation itself, health care and retirement are part of a large and  growing fiscal challenge. As policy makers deliberate over public policy  support for retirees, they will want to be cognizant of the related challenge  posed by the trends in the cost and availability of employer-sponsored  compensation.
section_title: Agency Comments
paragraphs: We requested comments on a draft of this report from the departments of  Labor and Health and Human Services.  We received technical comments  from the Bureau of Labor Statistics and the Employee Benefits Security  Administration at the Department of Labor and from the Agency for  Healthcare Research and Quality at the Department of Health and Human  Services. We also provided experts with the section of the draft that  characterized the exchange at the expert panel. We incorporated  comments where appropriate.
We are sending copies of this report to the Secretaries of Health and  Human Services and Labor, relevant congressional committees, and other  interested parties. Copies will be made available to others upon request. In  addition, the report will be available at no charge on GAO’s Web site at  http://www.gao.gov. Please contact me at (202) 512-7003 if you or your  staff have any questions about this report. Other major contributors to this  report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine recent trends in employers’ total compensation costs and the  factors contributing to the trends, we obtained data from the Department  of Labor’s Bureau of Labor Statistics (BLS). We used the BLS’ Employer  Costs for Employee Compensation (ECEC), which is derived from data  collected in the BLS’ National Compensation Survey (NCS). Although  employers spend funds on benefits and may change the benefit package  based on cost increases to control spending, BLS characterizes its survey  data as “costs” to employers. As such, we report on costs to employers.  NCS data are collected from a sample of establishments and include  information about the hourly costs of the components of total  compensation for a number of establishments and employee  characteristics. Samples are selected using a methodology called  probability proportional to employment size, which means that  establishments with larger employment have a greater chance of selection.  Weights are then applied to establish the estimates. Survey coverage  includes private sector establishments with one or more workers and state  and local governments with one or more workers. Agricultural, private  households, and the federal government are not included in the survey.  Our analysis focuses on private sector employers’ hourly costs for total  compensation, wages and salaries, and total benefits. Within total benefits,  we focus on the three most costly discretionary benefits—paid leave,  health insurance, and retirement benefits. Costs are calculated for active  workers and do not include costs for retiree benefits. We analyzed data for  the period 1991 to 2005. All data are from the first quarter of each year.  Those data that were not available from BLS’s on-line resources were  obtained directly from BLS.
In the ECEC, costs are measured as the average employer costs per  employee hour worked for wages and salaries and total benefits. To  control for the effect of inflation, we adjusted all dollars to 2004 terms by  using the BLS’s Consumer Price Index Research Series (CPI-U-RS) for  2004. The CPI-U-RS presents an estimate of the CPI for all urban  consumers from 1978 to 2004 that incorporates most of the improvements  in the CPI calculations made by BLS over that time period.
We used a z-test to test whether the costs in 2005 were statistically  significantly different from the costs in 1991. BLS provided us with the  relative standard errors (RSE) for the years 2000 to 2003, which BLS  officials contend provide reasonable estimates of what the RSEs are for  the earlier data. To ensure the greatest level of confidence, we used the  highest RSE between 2000 and 2003 to ensure a conservative measure of  statistical significance.
Our analysis included the following data elements:    Total compensation consists of the sum of costs for wages and salaries  and total benefits.
Wages and salaries are defined as the hourly straight-time wage rate, or  for workers not on an hourly basis, straight-time earnings divided by the  corresponding hours. Straight-time wages and salary rates are total  earnings before payroll deductions and include production bonuses,  incentive earnings, commission payments, and cost-of-living adjustments.
Total benefits include legally required benefits (Social Security,  Medicare, federal and state unemployment, and workers’ compensation).  Voluntary benefits reflected in the total benefits calculation are paid leave;  supplemental pay (overtime and premium pay, shift differentials, and  nonproduction bonuses); insurance benefits (life, health, short-term  disability, and long-term disability); retirement and savings benefits; and  other benefits (severance pay and supplemental unemployment plans).
Paid Leave includes vacation, holidays, sick leave, and other leave  such as personal leave, military leave, and funeral leave.
Retirement and Savings includes savings and thrift plans, defined  benefit, and defined contribution plans. Due to a change in the way  BLS classifies retirement plans, we report on the broader category of  “retirement and savings” in this report. Beginning in 1996, pension and  savings plans within existing sampling units were examined to  determine which were defined benefits or defined contributions and  were reclassified as such. Although the old divisions cannot be  compared with the new divisions, the overall category of retirement  and savings remains comparable.
Health insurance includes medical, stand-alone dental, and stand- alone vision.
Establishments are defined as single physical locations, such as a factory  or a retail store, and may be part of a larger firm. The break-outs for  establishment size were provided to us from BLS as small (1 to 99  employees), medium (100 to 499 employees), and large (500 or more  employees).
Union status is determined separately for each occupation in an  establishment. An occupation is considered union if all of the following  conditions are met: a labor organization is recognized as the bargaining  agent for workers in the occupation; wage and salary rates are determined  through collective bargaining or negotiations; and settlement terms, which  must include wage provisions and may include benefit provisions, are  embodied in a signed mutually binding collective bargaining agreement.  Not all employees need to belong to the union for the occupation to be  classified as such.
Full-time and part-time status is defined by the establishment reporting  the data.
Industry sectors and industries are based on the Standard Industrial  Classification System (SIC). The industries within each sector are in table  7. The industry definitions in the NCS changed in 2004, making data prior  to 2004 not comparable to the newer data. Therefore, we only present  industry data for the period 1991 to 2003.
We assessed the reliability of the ECEC data by reviewing BLS  documentation, interviewing BLS staff, and performing electronic tests to  check for outliers or other potential data problems. Based upon these  checks, we determined that the data were sufficiently reliable for the  purposes of our work.
To determine whether employees’ costs, participation, or access to  benefits have changed, we relied on data from two sources: (1) the BLS’  National Compensation Survey (NCS) and (2) the Medical Expenditure  Panel Survey-Insurance Component (MEPS IC) administered by the  Agency for Healthcare Research and Quality (AHRQ) at the Department of  Health and Human Services.
The BLS uses the NCS to measure the incidence and provisions of selected  employer provided benefit plans. We focused on employee coverage by  retirement and savings plans, including defined contribution and defined  benefit plans, and the provision of paid leave benefits. Coverage is not  necessarily the same as participation. For example, NCS produces data on  the availability of sick leave, but not on employees’ use of such benefit. In  addition, benefits data were not published every year. Data were available  between 1991 and 2003. Despite these issues, we felt the data were reliable  and useful in understanding whether and how employers’ provision of  retirement and paid leave has changed over time. We collected these data  from various BLS publications. We assessed the reliability of the data by  reviewing BLS documentation and interviewing BLS staff. Based upon  these checks, we determined that the data were sufficiently reliable for the  purposes of our work.
We used the MEPS IC to provide a detailed analysis of employee access  and participation in employer provided health insurance. The MEPS IC is  an annual survey of establishments that collects information about  employer-sponsored health insurance offerings in the United States. MEPS  IC data are tabulated by the AHRQ and tables are available for the period  1996 through 2003. MEPS tables include standard errors, which we used  to determine statistical significance in percentage changes over time. We  received electronic copies of the MEPS IC tables directly from the AHRQ.
The MEPS IC is derived from a random sample of private-sector business  establishments with at least one employee and a sample of state and local  government employers. We focused our analysis on the private-sector  only. The sample contains businesses that existed at the beginning of the  sample year and is supplemented with business births through the third  quarter of that year. The MEPS IC tables are reported both nationally and  for individual states. For our purposes, we focused on the national data  only.
We analyzed MEPS IC data to determine the trends in the percentage of  employees at establishments that offer health insurance, the percentage of  employees eligible for health insurance at these firms, the percentage of  eligible employees who enroll in the health insurance plans, and the  average annual premium for employer-provided health insurance for single  workers and the employees’ share of these premiums. To control for the  effect of inflation, all premium costs are reported in 2004 terms by using  the BLS’s Consumer Price Index for Medical Care. Inflation for medical  care has been great, and using an all items CPI (such as the CPI-U-RS)  would overstate the growth in premium costs.
Our analysis included the following data elements.
Offer health insurance—whether an establishment makes available or  contributes to the cost of any health insurance plan for current employees.
Health insurance plan—an insurance contract that provides hospital  and/or physician coverage to an employee or retiree for an agreed-upon  fee for a defined benefit period, usually a year.
Single coverage—health insurance that covers the employee only. Also  known as employee-only coverage.
Employee—a person on the actual payroll. Excludes temporary and  contract workers, but includes the owner or manager if that person works  at the firm.
Firm—a business entity consisting of one or more business  establishments under common ownership or control. Also known as an  enterprise. A firm represents the entire organization, including the  company headquarters and all divisions, subsidiaries and branches. A firm  may consist of a single-location establishment or multiple establishments.  In the case of a single-location firm, the firm and establishment are  identical.
Firm size—the total number of employees for the entire firm as reported  on the sample frame. The data were made available in the following break- outs: 1 to 9 employees, 10 to 24 employees, 25 to 99 employees, 100 to 999  employees, and 1000 or more employees.
Union status—employers are asked to identify if they have union or non  union employees.
Full-time and part-time employee—full-time is defined by the  respondent and generally includes employees that work 35 to 40 hours per  week. Part-time status is considered an employee not defined as full-time  by the respondent.
Industry categories—the primary business activity as reported by the  respondent. The industry categories that we report are based on the  Standard Industrial Classification (SIC) codes. These definitions match  those used in the ECEC (see table 7). The data were not readily available  by industry sector (goods-producing and service-providing).
We assessed the reliability of the MEPS IC data by reviewing AHRQ  documentation, interviewing AHRQ staff, and performing electronic tests  to check for outliers or other potential data problems. Based upon these  checks, we determined that the data were sufficiently reliable for the  purposes of our work.
To determine the possible implications of changes for private systems, we  convened a panel of 17 experts representing the human resources field,  industries, unions, and academia. Prior to the panel, we provided the  experts with a list of discussion questions and the completed data analysis.  During the half-day discussion, panelists provided their unique  perspectives on the trends we identified and offered comments on the  implications of these trends. We identified the panelists through  consultation with internal and external parties who work on the issues  covered in this report. We selected individuals who represent a wide  variety of entities that address the issue of workers’ benefits and provide a  balance of perspectives to help us understand the breadth of opinions on  the topic. The panel included the following list of experts.
section_title: Appendix II: Employers’ Real Hourly Costs for Employee Total Compensation, Wages, and Total Benefits
paragraphs: Appendix II: Employers’ Real Hourly Costs  for Employee Total Compensation, Wages,  and Total Benefits Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the 95  percent confidence level.  workers)
Medium (100-499  workers) workers)
Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the 95  percent confidence level.
The growth rates for certain groups of employers may be higher than the aggregated average growth  rate due to changes in employment composition and compensation cost levels overtime.
Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the 95  percent confidence level.
The growth rates for certain groups of employers may be higher than the aggregated average growth  rate due to changes in employment composition and compensation cost levels overtime.
Percentage change 1991 -  2003  Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
BLS began using new codes to classify industries with the 2004 data. Therefore, 2004 and 2005 data  were not comparable to 1991-2003 by industry.
section_title: Appendix III: Employers’ Real Hourly Costs for Employee Paid Leave, Retirement Income, and Health Insurance
paragraphs: Appendix III: Employers’ Real Hourly Costs  for Employee Paid Leave, Retirement Income,  and Health Insurance Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
subsections: section_title: Retirement and
paragraphs: Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
section_title: Retirement and
paragraphs: Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
section_title: Paid leave
paragraphs: Data represent costs to private employers only.
Bold signifies that percentage changes between 1991 and 2005 are statistically significant at the   95 percent confidence level.
BLS began using new codes to classify industries with the 2004 data. Therefore, 2004 and 2005 data  were not comparable to 1991 to 2003 by industry.
section_title: Appendix IV: GAO Contacts and Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: Patrick di Battista, Assistant Director, and Sara L. Schibanoff, Analyst-in- Charge, managed this assignment. Others who made key contributions  throughout the assignment include James Pearce, Jean Cook, and   Susan Bernstein. Dan Schwimer provided legal assistance. Marc Molino  and Mimi Nguyen provided assistance with graphics.