Rethinking Employee Benefits

With legacy costs for benefits cleaving the corporate world into competitive and uncompetitive companies, U.S. executives may be ready for fundamental change.

The cost of employee benefits in the United States is killing profitability for whole sectors. The most determined companies have aggressively reshaped their benefit programs to pull their expenses down to more manageable levels, but even the best efforts have yielded only modest results. Cost structures incurred by employers that offer comprehensive benefits cannot be sustained through the next business cycle. Perhaps more important, U.S. employers' benefit expenses increasingly undercut their competitive position in the global economy. The portion of total compensation consumed by benefits is already higher in the United States than in any other developed nation, as is benefit spending per employee. Benefit costs abroad are lower and more stable because they are commonly covered through state programs and higher taxes instead of employer purchases from private insurers and providers.

Insurance premiums for health benefits sponsored by U.S. employers reached $520 billion in 2004. Companies with underfunded pension plans reported a shortfall of $279 billion in their June 2004 filings with the Pension Benefit Guaranty Corp. General Motors, the largest private provider of health and retirement benefits in the world, has flatly announced that its programs are not sustainable, and the legacy airlines are drastically reducing or terminating their pension plans.

The National Coalition on Health Care, which counts among its members some of the largest corporations in the United States, is calling for comprehensive reform of the nation's health-care systems and mandatory universal coverage.

For both health and retirement benefits, the remaining options for cost reduction are relatively limited and require far more radical changes than most organizations have found palatable in the past. Recent developments indicate, however, that companies may be ready to start down a different path to meeting their workforce's health-care and retirement needs. And because labor markets will remain relatively soft throughout 2005, corporate decision-makers have an opportunity to explore approaches that might not be feasible otherwise.