Health care, pension, and disability plans account for the bulk of employers' benefit costs, as defined in this article. Because those costs tend to rise as employees get older, the age structure of the workforce affects not only employers' costs but ultimately their competitiveness in global markets. How much costs vary depends in large part on the structure of the benefits package provided.
The method a company chooses to finance benefits generally varies with its size. This article focuses primarily on the benefit practices of large, private employers. In the long run, such employers pay the costs associated with the demographics of their workers, whereas small employers can often pool costs with other companies in the community. In addition, small employers often offer fewer benefits, and the costs and financing of those benefits are subject to the insurance markets and state regulations.
The discussion of benefit packages is illustrated by case studies based on benefits that are typical for three types of organizations-a large traditional company such as steel, automobile, and manufacturing; a large financial services company such as a bank or health care organization; and a medium-sized retail organization. The case studies demon
strate the extent to which the costs of typical packages vary and reveal that employers differ radically in the incentives they offer employees to retire at a specific time. An employer can shift the variation in cost by age by changing the structure of the benefit program.
The major forces that drive age differences in benefit costs are the time value of money (the period of time available to earn investment income and the operation of compound interest) and rates of health care use, disability, and death. Those forces apply universally, in the United States and elsewhere, and they have not changed in recent years. However, the marketplace and the prevalence of various types of benefit programs have changed, and those changes have generally resulted in less cost variation by age and more frequent employer selection of benefit packages that exhibit less variation by age.
A 1984 study on the costs of employing older workers, prepared for the Special Committee on Aging of the U.S. Senate (Rappaport and Morrison 1984), found that substantial benefit costs are associated with age and that those costs vary with the structure of the benefit package. Those findings still hold true today. The forces responsible for the differences in benefit costs by age-the amount of time available to earn investment income and the operation of compound interest, plus differences in rates of illness and death-- have not changed in the past 16 years. However, there has been a change in the prevalence of various types of benefit programs and in market practices, notably:
* A growth in employment in smaller companies, which frequently offer fewer and less generous benefits.
* A shift from traditional defined benefit plans to defined contribution plans and cash balance plans, which have much less variation in cost by age.
* An increase in the use of matched savings programs and in the size of the match. (The costs of those programs do not vary by age.)
* New forms of health benefit plans and new variations in risk sharing between insurer and employer.
* An increase in employee contributions for health plans. (Those contributions do not vary by age, whereas costs do, thus increasing the employees cost variation.)
* An increase in the use and costs of prescription drugs and a shift from inpatient to outpatient health care.
* Growth of flexible benefit programs, in which employees are allocated credits that they use to buy benefits from a menu.
These changes have generally resulted in less cost variation by age today and more frequent employer selection of benefit packages that exhibit less variation by age. …