A Futurist Past

Salisbury

Salisbury

By Dallas Salisbury, EBRI

At EBRI’s 35th anniversary policy forum last December, it occurred to me that one of the youngest minds in the room happened to belong to the oldest panelist we had invited. Arnold Brown, 87 when he spoke at our forum, was nationally renowned not only for his insightful observations about the future, but his often surprising predictions of how the American labor force—and the employment-based benefits on which they depend—might change in response. How fitting that the forum panel on which he participated was titled “The Road to Tomorrow.”¹

So I was especially saddened to hear of his recent passing, shortly before his 88th birthday. He died surrounded by family, who described him as “brilliant, witty, wise and generous.” Having followed him and his work closely in my own career, I would agree with all that and more.

At a time when news reports warn of the “technological divide” between the young and the old in this country, Brown’s specialty was using hard data to help us understand why and how technology is changing our lives. Ironically for a tech-head, he started out as an English major (he graduated with honors from UCLA), before going on to serve in the Navy.

Arnold Brown

Arnold Brown

His big break on the national stage came when he was vice-chairman of the American Council of Life Insurers, where in 1969 he created ACLI’s Trend Analysis Program. This was the first, and considered among the best, “environmental scanning programs” that focused on long-range business planning and strategy. In 1977, he formed his own company, Weiner, Edrich, Brown, Inc., consultants in strategic planning and the management of change, where many of the biggest companies in the world would become clients. Not surprisingly, he served as board chairman of the World Future Society.

Much of his recent work focused on the trend toward “deskilled workers,” as more and more employers turn to computers, software, and robots to replace both blue-collar and white-collar human employees. He pointed out the many ripple effects that is already having and will have going forward, especially on state and federal social insurance programs that depend on taxes drawn from employment payrolls to survive. As workers are increasingly replaced by robots, Brown asked at the EBRI forum, “Should we require employers of robots to pay Social Security for them?”

Among his other thought-provoking, data-driven points at the EBRI forum:

  • The prolonged recession has masked what he called a “profound transformation of the economy” driven by automation, one that has to do with the very nature of work and jobs as the nation moves into the future. In 2012, he noted, approximately 85 percent of robots were purchased were for manufacturing purposes, and within the next few years 30 percent or more of robots will be for non-manufacturing, white-collar use.
  • Part-time, contract, and temporary workers are becoming the norm worldwide. Brown noted that in France in 2012, 82 percent of the new jobs created were temporary, and in Germany, what are referred to as “mini jobs” (low-paid, short-term jobs) now comprise 20 percent of all jobs in that economy. Another aspect of this job trend: Of the 16-to-25-year-old cohort not currently in school, barely a third (36 percent) have full-time jobs, and a major reason for this is new technology (such as 3-D printing), he said.
  • The upshot is that “The old model of the contract between employer and employee is increasingly obsolete,” Brown said at the EBRI forum, and “more and more, we will need a new model of what the relationship will be between the employer and the employee.” Over the next 35 years, he predicted, there will evolve “an entirely different, unprecedented relationship in the workplace between employers and employees, and what the consequences of that will be are really very profound in terms of what your businesses will be facing.”

Professionally, I greatly admired his acute use of data to make highly informed analysis about the future. Personally, I deeply admired how someone almost in his 90s lived so much in the future.

In Washington, there is naturally great attention given to how federal law (particularly tax law) and regulation affect business and employee benefits. But Arnold Brown’s focus was elsewhere: How the economy—and the underlying technology and skills that drive it—affect not only the business world, but society as a whole, faster and far more powerfully than even government policy.

His keen mind and often accurate predictions will be missed.

Notes

¹ The complete report on the EBRI 35th anniversary policy forum, “Employee Benefits: Today, Tomorrow, and Yesterday,” is published in the July EBRI Issue Brief and is online here.

Pre-Existing Conditions?

Nevin AdamsBy Nevin Adams, EBRI

Much has been made of the so-called employer mandate of the Affordable Care Act, and its postponements. Of course, as a recent EBRI publication points out, the mandate (currently slated to be enforced effective in 2015) applies only to employers with 50 or more full-time workers – and most of these employers already offer health coverage to their workers. Last year, 91 percent of employers with 50–199 workers offered coverage, as did 99 percent of employers with 200 or more workers, according to the EBRI analysis.

However, the Patient Protection and Affordable Care Act (PPACA) defines a full-time employee as one who works 30 or more hours per week, on average – well below the 40-hour-week threshold typically associated with full-time employment. As a result, there is concern that employers may respond by cutting back on health coverage for part-time workers or by decreasing part-timer hours to keep them below the 30-hour-week threshold.

The EBRI report notes that, overall, there were 20 million workers employed under 30 hours per week and 18.8 million employed 30–39 hours per week in 2012. Among those employed between 30 and 39 hours per week, 6.3 million (33.6 percent) had employment-based coverage from their own job. In contrast, 60.5 percent of workers employed at least 40 hours per week had employment-based coverage from their own job.

Has the PPACA led to a reduction in hours? The EBRI analysis finds that between 2006 and 2010 (the year that PPACA was signed into law), the percentage of workers employed fewer than 30 hours per week increased from 11.9 percent to 14.1 percent, while the percentage of workers employed 30–39 hours per week also increased, from 11.4 percent to 13.2 percent over the period. Since passage of PPACA, there has actually been a slight drop in the use of part-time workers, though this may be attributable to the drop in the unemployment rate.

Indeed, the percentage of workers with coverage through their own job has been trending downward since 2007 regardless of hours worked per week. However, in relative terms, the EBRI report notes that part-time workers have experienced a much larger decline in coverage than full-time workers. Between 2007 and 2012, workers employed 40 or more hours per week experienced a 3 percent reduction in the likelihood of having coverage from their own job, while those employed 30–39 hours per week experienced a 12 percent decline (those employed fewer than 30 hours per week experienced a 20 percent decline).

Among workers employed 30–39 hours per week, both those who worked for a large employer and those who worked for a small employer experienced a 9 percent decline in coverage between 2008 and 2012.

The data confirm that the recent recession resulted in an increased use of part-time workers, but since 2010 the percentage of workers employed less than 40 hours per week has declined slightly. The data also indicate that while both full-time and part-time workers have experienced drops in health coverage, part-time workers have been affected disproportionately.

The question, of course, is whether PPACA’s full-time worker definition will accelerate – or ameliorate – those trends.

  • Notes

“Trends in Health Coverage for Part-Time Workers, 1999–2012” is published in the May EBRI Notes at http://www.ebri.org/pdf/notespdf/EBRI_Notes_05_May-14_PrtTime-Rollovers.pdf

 

“Crisis” Management

Nevin AdamsBy Nevin Adams, EBRI

“Houston, we have a problem.”

That’s perhaps the most famous quote from one of my favorite movies—the 1995 “Apollo 13,” the story of the ill-fated moon landing mission of the same name. As the third such undertaking, it was a mission that the nation largely ignored—until that mission ran into trouble. Trouble in this case meant having an oxygen tank explode two days into their trip to the moon, which led to a reduction in power, loss of heat in the cabin, a shortage of drinkable water, and ultimately the need to jury-rig the system that removed carbon dioxide from the cabin. Arguably, Apollo 13 didn’t have a “problem”; they had a crisis, and one that threatened their very lives.

While we’re a few years removed from the financial crisis that led to the so-called Great Recession, “crisis” is a word much bandied about these days. Crisis is, after all, one of those descriptors that cry out for swift and decisive action—and the industry of employee benefits has its fair share. Thus, whether it’s the looming retirement crisis some see (or see for some) on the horizon, the crippling impact of college debt on the finances (and future financial security) of younger Americans, or the health care crisis that the ACA was designed to forestall (or that some say is destined to create), we are all challenged and confronted—by those at nearly every point along the political spectrum—with the urgency of the need to address the “crisis.”

But do these circumstances constitute a “crisis”? A review of the dictionary definition of crisis reveals the following perspectives: “A crucial or decisive point or situation; a turning point”; an “unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change”; a “sudden change in the course of a disease or fever, toward either improvement or deterioration.”

On May 15, the Employee Benefit Research Institute will host its 74th Policy Forum, titled “‘Crisis’ Management: Uncertainty and the Workplace.” We’ll examine the current and projected future state of retirement readiness, employment-based health care, and the role that approaches such as financial wellness can play in alleviating the strains of uncertainty.

It promises to be an interesting and insightful discussion—one that you can expect to learn from and profit by participating, whether you’re looking for ideas to help stave off a systemic crisis, to better understand the current and future environment of employment-based benefits and the policies that could have an influence, or for ways to improve the current system(s).

It may or may not be a crisis—but these are topics whose resolution could well affect all our lives.

Reserve your place today at http://www.ebri.org/register/.
– Notes 

[1] Iconic as it might be, the movie’s most famous quote, “Houston, we have a problem”, wasn’t an accurate quote. According to NASA audio files, Astronaut Jack Swigert first said, “OK Houston, we’ve had a problem here.” Mission Control said, “This is Houston. Say again, please.” Then Jim Lovell said, “Ahh, Houston, we’ve had a problem.”

Because “we’ve had” implies the problem has passed, movie director Ron Howard chose to use “we have”.    

Safety “Net”

By Nevin Adams, EBRI

Nevin Adams

Nevin Adams

I’m one of those travelers who absolutely dreads cutting it to the last minute. Not that I haven’t been forced to do so, from time to time, but I’m generally the one chomping at the bit to get to the airport, or to hit the highway an hour before anyone else. In my defense, on more than one occasion that “cushion” has been the difference between catching a flight or not. Planning that only considers a “best” or “normal” scenario too often overlooks the unexpected—and sometimes that margin of error is all you have.

For over a decade EBRI has modeled the nation’s potential retirement savings shortfall, and the EBRI Retirement Readiness Ratings™ provide an assessment of how many Americans are at risk of running short of money for needed expenses in retirement. In contemplating expenses, that model considers the regular expenses of living in retirement, as well as uninsured medical expenses, and the potential costs of nursing home care.

However, we have also documented and quantified the role of Social Security, defined benefit and private retirement accounts on retirement income adequacy for Baby Boomers and Gen Xers with an eye toward replacing their preretirement wages and income. While this more traditional focus on income replacement may misstate an individual’s actual post-retirement financial situation, many financial planners work with this goal as a starting point, and it can provide valuable insights particularly when—as is the case with EBRI’s projections—it is able to leverage actual 401(k) data from the unique EBRI/ICI 401(k) database, the largest such repository in the world.

Indeed, based on a recent EBRI analysis, between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with current levels of Social Security retirement benefits, will be able to replace at least 60 percent of their age-64 wages and salary on an inflation-adjusted basis. When the threshold for a financially successful retirement is increased to 70 percent replacement of age-64 income, 73–76 percent of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80 percent replacement rate, 67 percent of the lowest-income quartile will still meet the threshold; however the percentage of those in the highest-income quartile deemed to be “successful” relying on just these two retirement components slips to 59 percent, reflecting the progressive nature of Social Security.

As positive a result as that seems for many, when the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1 percent automatic escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88–94 percent at a 60 percent threshold; 81–90 percent at a 70 percent replacement threshold; and 73–85 percent at an 80 percent threshold.

That’s not quite the doomsday crisis scenario portrayed by many of the headlines in vogue today, though EBRI’s projections still show that a large number of Americans—even among those eligible for a 401(k) plan for 30 years—won’t be able to replace that pre-65 salary even at the various levels modeled, based on current savings patterns.

It does, however, illustrate the impact that changes in those current savings behaviors can have—and it underscores the significant role of Social Security as a vital safety net for the nation’s retirement security.

Note

“The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis” is available online here.

Use It or “Lose” It

By Nevin Adams, EBRI

nevinadams

At the time that EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013—in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran, and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else.

My employer had a nice defined benefit (DB) pension, and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former—well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). Turns out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (that by then had become a 401(k)), and a pension accrual of…$0.00.

At the time, I didn’t think much about that.  Like many private-sector workers, I hadn’t contributed anything to that pension, and thus getting “nothing” in return didn’t feel like a loss.

By the time I left my second employer (this time after 13 years), the mandated vesting schedules had been shortened by legislation—but even then, the benefit I hope to collect one day won’t amount to much on an annual basis, and won’t be anything like the benefit that plan might have provided if only I had remained employed there – for the past 20 years. Instead, like my service with that prior employer, that DB benefit is frozen in time. That result stands in sharp contrast with the 401(k) balances I have accumulated and that continue to grow, despite having changed employers twice since then.

Of course, national tenure data suggest that my job experience was something of an anomaly.  When you consider that median job tenure in the United States  has hovered in the five-to-seven-year range going back to the early 1950s[i], there have doubtless been many private-sector workers who were, for a time, like me, participants in a traditional defined benefit pension plan, only to see little or nothing come of that participation[ii].

I often hear people say that 401(k)s were “never designed to replace pensions,” a reference to the notion that the benefit defined by most traditional pension plans stood to replace a significant amount of pre-retirement income at retirement.  Now, there’s no question that the voluntary nature of the 401(k) programs, as well as their traditional reliance on the investment direction and maintenance by participants, can undermine the relative contribution of the employer-sponsored plan “leg” to a goal of retirement income adequacy.

However, what often gets overlooked in the comparison with 401(k)s is that when you consider the realities of how most Americans work, traditional defined benefit realities frequently fell short of that standard as well. Indeed, in many cases, based on the kinds of job changes that occur all the time, and have for a generation and more, they could provide far less[iii].

In both cases, it’s not the design that’s at fault—it’s how they are used, both by those who sponsor these programs, as well as those who are covered by them.

Notes 


[i] See “Employee Tenure Trends, 1983–2012” available here.  

[ii] And a great number of private-sector workers never participated in a defined benefit plan.  See “Pension Plan Participation” available here.  

[iii] A recent EBRI Issue Brief provides a direct comparison of the likely benefits under specific types of defined contribution (DC) and DB retirement plans. See “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans”.

System Upgrades?

By Nevin Adams, EBRI

Adams

Adams

I recently upgraded the operating system on my iPhone. Not that that would normally be a big deal—I generally try to keep such things current, despite the occasional “bumps” that inevitably come with software upgrades. But this time the upgrade wasn’t just about improving performance and fixing issues that had been identified since the last update.  No, this one not only LOOKED different, some core functions were said to work differently—and “different” in this case appeared to be a problem for a number of users.

So, before I took the “plunge,” I spent some time trying to do some research—trying to find out what kinds of improvements I could anticipate, and to better understand the complaints associated with an upgrade from which there was, apparently, no “return.” The upgrades were readily quantified (on the vendor’s website most notably), although I think it’s fair to say they had a motivation in promoting the new system. However, most seemed to be relatively unimportant in terms of how I used, or planned to use, my device. As for the problems: Well, they were equally easy to find, but harder to quantify. And, like those product ratings on any website, were from people I did not know and whose judgments I had no particular reason to trust.

Consequently, stuck between conflicting perspectives, and seeing no particular advantage in making a change, I did what most human beings do. Nothing. Until, with my current contract expiring, I realized that the upgrade was likely to be imposed on me at that point, regardless of my preferences.

On October 1, the public marketplaces (formerly known as connectors or exchanges) associated with the implementation of the Patient Protection and Affordable Care Act (PPACA) will begin to come online—in various phases and, from what one can discern from published reports and official updates, in various states of readiness. The advantages have been outlined, as have the potential pitfalls. Doubtless the experiences will be as varied as the experience(s) and expectation(s) of the individuals involved.

However, it’s hardly a new idea. Back in 1980 the conservative Heritage Foundation began advocating that the Federal Employee Health Benefit Program (FEHBP—a marketplace for multiple insurers and scores of plan options) become a model for expansion of health coverage through an individual mandate. Today, simply telling those in Washington, DC, that “the marketplaces are just a version of FEHBP” brings an immediate understanding of the concept.

A year ago, EBRI published an Issue Brief that outlined the issues related to private health insurance exchanges, possible structures of an exchange, funding, as well as the pros, cons, and uncertainties to employers of adopting them. That report contained a summary of recent surveys on employer attitudes, as well as some changes that employers have made to other benefits that might serve as historical precedents for a move to some type of defined contribution health benefits approach. It is a report that provides both current analysis alongside a historical perspective—a resource for those looking to better understand and plan for the potential changes ahead.¹

That said, when Paul Fronstin, EBRI’s director of Health Research and the EBRI Center for Research on Health Benefits Innovation, updates the information in the future, he may well call them marketplaces, unless the name “upgrades” again in the weeks ahead!

Notes

¹ See “Private Health Insurance Exchanges and Defined Contribution Health Plans: Is It Déjà Vu All Over Again?” online here.

You can find a catalogue of recent EBRI research on PPACA and its potential impact on employment-based health benefits online here.

“Some” Totals

By Nevin Adams, EBRI

Adams

Adams

There’s an old tale about a group of men that are blindfolded and then asked to describe an object (in the story, an elephant, though they don’t know what it is), based on their individual observations. In doing so, each one grasps a different part, but only one part, such as the side, the trunk, the tail, the ear, or a tusk.

Following their individual assessments of what is ostensibly the same object, they compare notes―and are puzzled to find their conclusions about the object’s appearance to be in complete disagreement.

A recent EBRI Notes article¹ examined retirement plan participation through the prism of data from the Survey of Income and Program Participation (SIPP), which is conducted by the U.S. Census Bureau to examine Americans’ participation in various government and private-sector programs that relate to their income and well-being.

Now, as the EBRI analysis notes, the SIPP data have the advantage of providing relatively detailed information on workers’ retirement plans, but SIPP is fielded only once every three to five years. By comparison, the Current Population Survey (CPS), which is also conducted by the U.S. Census Bureau, provides overall participation levels of workers on an annual basis, but the CPS does not provide information on the specific types of plans in which the workers are participating. Another data source is the Bureau of Labor Statistics’ (BLS) National Compensation Survey, which annually surveys establishments’ offerings of employee benefit programs, including retirement plans―but at an employee level it includes information only on occupation, union status, and part-time/full-time work, and no information on age, gender, or race/ethnicity. Consider also that the CPS collects information about anyone who worked at any point in a previous year, while SIPP and BLS ask only about current workers in the month of interest.

As you can see, each of these national (and widely cited) surveys collects data in a different manner, at different times, and has different questions that can lead to different conclusions. Consider the chart below. The top line shows retirement plan participation rates for all workers from SIPP, and the lower line graphs retirement plan participation, also for all workers, from the CPS. While the trend lines generally move in the same direction, the more frequent CPS data allows us to see the more incremental movements―and to see a drop in participation rates in 2000–2002 following the burst of the tech bubble that would be completely missed looking only at the SIPP results. Moreover, relying strictly on SIPP data, one might well be inclined to see an increase in participation rates, rather than the leveling off that we see based on CPS data.²

That said, each survey provides important data that can’t be found elsewhere: CPS has the annual participation data with a complete set of worker demographics, while SIPP has the complete set of worker demographics plus retirement plan types, and BLS has detailed data on establishment characteristics, along with retirement plan type, although with limited worker demographics.

There was nothing inherently wrong in the individual observations made by the three blind men in the story―other than their examinations focused on one particular attribute, rather than appreciating the reality that a truly accurate assessment required looking at ALL the pieces, rather than each in isolation.

Similarly, and as the EBRI analysis concludes, those who would draw conclusions from individual surveys or datasets are well-advised to benchmark those results against other data, lest they conclude that the elephant(s) in the room are different than they truly are.

NA.Blog.Sept6.Fig

Notes

¹ See “Retirement Plan Participation: Survey of Income and Program Participation (SIPP) Data, 2012,” online here.

² Another potential limitation of these surveys is that they are based on self-reported information, which is to say they rely on respondents’ recollections, rather than actual administrative plan data or IRS tax records. For SIPP specific results, see, for example, Irena Dushi, Howard M. Iams, and Jules Lichtenstein, “Assessment of Retirement Plan Coverage by Firm Size, Using W-2 Tax Records,” Social Security Bulletin, Vol. 71, No. 2, 2011, pp. 53–65, online here.

“Upside” Potential

By Nevin Adams, EBRI

Adams

Adams

I once spent a very uncomfortable period of time stuck in one of those carnival rides that, for brief periods of time, spins riders in a circle as the cab you are in also twirls. As uncomfortable as the ride was, the “stuck” part came while my cab was high in the air—and turned upside down. In no time at all, it was obvious that this extended “upside down” state wasn’t contemplated by those who designed the seating compartment (nor, apparently, had they considered that my compartment “mate” would find it exciting to rock our stuck cab during our brief “internment”).

One of the comments you hear from time to time is that the tax incentives for 401(k)s are “upside down,” that they go primarily to those at higher income levels, those who perhaps don’t need the encouragement to save. And from a pure financial economics perspective, those who pay taxes at higher rates might reasonably be seen as receiving a greater benefit from the deferral of those taxes.

Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary. However, drawing on the actual administrative data from the massive EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), those ratios hold relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000.

In other words, while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes—and not “upside down.”

082.2Aug13.Fig

(click to enlarge)

As those who work with these programs know, what keeps these potential disparities in check is the series of limits and nondiscrimination test requirements: the boundaries established by Internal Revenue Code Secs. 402(g) and 415(c), combined with ADP and ACP nondiscrimination tests. Those plan constraints were, of course, specifically designed (and refined) over time to do just that—to maintain a certain parity between highly compensated and non-highly compensated workers in the benefits available from these programs. The data suggest they are having exactly that impact.

And that’s why focusing only on the incentives—and not also on the limits—can leave you “stuck” with only part of the answer.

Decision Decisions

By Paul Fronstin, EBRI

ImageMost employers find that while they would like to continue providing health benefits to employees and their dependents, longer-term cost trends are unsustainable.  Those trends, combined with the forthcoming decision by the Supreme Court of the United States (SCOTUS) on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) (in whole or in part – notably the individual mandate), and uncertainty related to the future of health care delivery and financing in the United States are causing many employers to start to rethink their role as a provider of health coverage in the workplace.

While there is a possibility that the entire law could be declared unconstitutional, most of the controversy surrounding the PPACA has involved the law’s requirement that individuals either purchase insurance or pay a penalty, the so-called “individual mandate.”  There are basically four ways1 in which SCOTUS might rule on the constitutionality of this provision in the PPACA:

  1. Rule that the individual mandate is constitutional and let implementation of the law proceed;
  2. Rule that the individual mandate is unconstitutional, but that the individual mandate is severable and therefore implementation is allowed to proceed with all other parts of the PPACA;
  3. Rule that the individual mandate is unconstitutional but severable from the remainder of the law, but discards other connected parts of the PPACA, such as guaranteed issue and community rating;
  4. Rule that the individual mandate is unconstitutional, and that the individual mandate is not severable from the PPACA, therefore the entire PPACA is found to be unconstitutional.

As of this writing, only the justices know the decision, but speculation (and odds making) is occurring on a daily basis.  It is unlikely that the court would strike down the individual mandate and discard other connected parts (option 3 above), because it does not have the equivalent of “line-item” veto power of laws passed by Congress.  If the ruling finds the mandate severable from the rest of the law (option 2 above), Congress will inevitably try to fix the PPACA, but it is impossible to predict what the fix may look like given the current political climate and the potential for political gridlock regardless of the outcome of the next election.  If the court rules that the law is unconstitutional (or that the individual mandate is, and is inseparable from the rest of the law, necessitating its rejection), the status quo of the past will return, but with a potential nightmare scenario where the parts of the PPACA that have already been implemented would need to be  “unimplemented” (such as funding provided to the states to establish exchanges, or the deductibility of health care coverage offered to the newly created category of adult dependents under the PPACA that would ostensibly now be subject to taxation), potentially triggering numerous lawsuits and additional political ill will.

While health care reform discussions that ultimately led to the passage of the PPACA started out as discussions regarding system reform that would result in lower health care costs, they quickly morphed into discussions about coverage that largely ignored the overall cost of health care services and health insurance coverage.  Thus, regardless of the outcome of the Supreme Court decision, or the fall elections, health care costs are expected to continue to increase in the future.

What Will Employers Do?

If employers go down the current road they are on and stay with the status quo, we will likely continue to see cost-shifting to workers and the introduction of and experimentation with carrots and sticks in order to change the health behaviors of workers and their dependents.

However, were employers to decide to move away from traditional employment-based health coverage, there are a number of alternative approaches they might consider:

1) De-link health coverage from work.  Employers might endorse a system where they have absolutely no connection to health coverage.  Some have proposed a single-payer system, and others have proposed a purely individual market; there are precedents for both.  Medicare began as the equivalent of a single-payer system for health coverage for seniors but has since evolved into a hybrid public-private partnership, as private plans are an alternative for Medicare beneficiaries.  The private-plan part of Medicare could be expanded to move away from the predominant single-payer-system aspect of Medicare to one that looks more like an individual market (such as that contemplated in the proposal put forth by Congressman Paul Ryan (R-Wisconsin)). Under a single-payer system alternative to the current employment-based system, employers would no longer provide coverage.  Instead, either the federal government or the states would provide coverage, with financing provided through some type of tax.  Alternatively, a purely individual market might look very much like the exchanges contained in the PPACA, with subsidies for low-income workers, or a voucher-type system (also as proposed by Congressman Ryan for Medicare).  Financing for either would come from some type of tax system as well.

2)  Re-define the link between health coverage and work.  Employers have been interested in the concept of “defined contribution” for years as a way to provide health coverage to workers.  While there is no one way in which to define such a concept, presumably it would work in a way in which employers are able to better control or “define” their contribution towards health coverage.  Under that scenario, public exchanges as described in the PPACA could be the vehicle through which workers would get their coverage, with employers either paying some kind of coverage charge (such as the $2,000 penalty included in the PPACA), or the employer may itself seek to make coverage arrangements through third-party private exchanges. Such a system may or may not produce short-term cost savings to employers, depending on individual specifics of how employers transition to such a system, but could provide long-term savings if employer contributions do not rise as fast as premiums would otherwise have grown, or if premium growth is flat (due to the more market-driven system). In such a system, employers would no longer be involved in decisions regarding the design of health care.  Rather, they would simply provide the funding mechanism for workers to purchase health coverage through a party separate from the employer.  Employers have shown interest in this concept in the past through position papers published by the CED  and the ERISA Industry Committee as recently as 2007.  Moving towards these private exchanges would not require a change in law, regardless of the SCOTUS decision, and would be permitted under current law unless prohibited by a future Congress.

After three+-plus years of contentious debate and the challenges associated with understanding and attempting to comply with the new law, it seems that employers are at a crossroads: try to continue with the current employment-based system of health coverage, or undertake to try to fundamentally redefine the system that the United States has essentially lived with since World War II.

It is unlikely that employers will simply take the fork when they come to it in the road.

Notes:

1. There is, of course, also the possibility that SCOTUS will remand the issue of severability back to the lower court, tying up the PPACA in court for a longer period of time, creating more uncertainty, but basically leaving things in play for the time being.

Retirement Roundup in Washington: The Future of Pensions

By Nevin Adams, EBRI

Nevin Adams, EBRI

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.” The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.

• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

• Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

• Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

• Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.