Recent economic shocks have prompted American workers to rethink their long-term financial goals and security. Many of them are feeling the pinch of higher out-of-pocket health costs, stagnant wages, restructured retirement programs1 and lingering financial losses. So it's no surprise to find that workers have become more concerned about their retirement security. Despite their financial worries, many are increasingly willing to trade cash compensation for greater certainty and more generous health and retirement benefits.
This is the second in a series of three articles based on Towers Watson's 2013/2014 Global Benefit Attitudes Survey of workers' perceptions of employer-sponsored benefits. The first article, "Workers Still Uneasy About Financial Security and Retirement," reported on employees' current financial situations and their plans for retirement.2 The next article will highlight how employer-sponsored benefits affect attraction and retention.
Retirement security becoming increasingly important
More than half of employees reported that retirement security had become more important to them over the last few years (Figure 1). Seventy-eight percent of workers aged 50 or older are concerned about their retirement security, compared with 39% of employees under 40.
Perhaps reflecting fears of further curtailments, participants in defined benefit (DB) plans worry more about retirement security than participants with only defined contribution (DC) plans. Cutbacks to existing plans heighten workers’ concerns about retirement security. In fact, 75% of DB plan participants whose plans have been frozen are concerned about achieving a financially secure retirement.
Employer-sponsored plans are workers’ primary retirement savings vehicles
The way employees save is predominantly through the programs offered by their employer. Seventy-four percent of employees cite their employer plans as their primary means of saving for retirement (Figure 2), up from 61% in 2009. This increased reliance on employer-sponsored plans might reflect workers’ concerns about the future value of Social Security — an observation highlighted in the previous article. While the reliance rate is high for all employees, it is particularly high for younger workers with a DB plan (81%).
With the exception of older participants with only a DC plan, all employees expect these plans to be their primary source of retirement income (Figure 3). Older DC plan-only participants are more likely to expect most of their retirement income to come from Social Security.
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Satisfaction with benefits varies
Two-thirds of employees are satisfied with their retirement plans (Figure 4). Satisfaction has climbed 13 percentage points since 2009, with much of the increase concentrated among younger employees and DB plan participants. DB plan participants have higher satisfaction rates despite the frequent erosion of these benefits over the last decade.
Yet, DB plans are still typically more generous than the DC plans that replace them. In fact, program satisfaction drops to 56% for DB plan participants whose benefits were recently frozen and to 43% for DC plan-only participants whose employers reduced their contributions.
While satisfaction with retirement plans is rising, satisfaction with health care plans is declining across all demographic groups. Almost seven in 10 workers were happy with their health plans in 2007, but satisfaction rates dropped to 59% in 2013, a 10-percentage-point decline (Figure 5). This downward trend is most pronounced among older workers and those in poor health. Only 48% of those enrolled in high-deductible health plans (HDHPs)3 are satisfied with their health care plan. Given the increasing popularity of point-of-care cost sharing in health care program designs along with an aging workforce, plan satisfaction may weaken further in the future.
Rising costs are a key factor fueling the decline in health plan satisfaction, particularly higher out-of-pocket expenses (point-of-care costs). Employee satisfaction with medical costs has fallen substantially, from 53% in 2007 to only 38% in 2013 (Figure 6). Again, satisfaction is lowest for those with an HDHP, older workers and those in poor health.
Another important measure of value is whether the retirement or health plan is effective in meeting employees’ needs. This measure tends to pose a higher threshold than satisfaction, because it reflects whether the program does a good job of providing a secure retirement or paying for health care. On the other hand, satisfaction tends to reflect employees’ expectations of the program and how it compares with those provided by other employers, which in some cases represents a lower bar.
For retirement plans, effectiveness levels are a full 20 percentage points lower than satisfaction levels (Figure 7). Employer plans might be employees’ first line of retirement saving, but employees recognize that their plans are unlikely to see them through retirement. Perhaps employees tend to be satisfied with what they have because there are so few attractive alternatives.
There is not the same divergence for health care plans: 62% of employees say their plan meets their needs and 59% are satisfied with the plan. This might be because most large employers provide comprehensive health care benefits. And point-of-care costs seem to have little impact, as 58% of those enrolled in an HDHP say their health plan meets their needs. However, employees managing a health issue are less positive. Only 45% of workers in poor health — those who need health insurance the most — say their plan supports their medical needs.
Employees willing to pay more for retirement benefits than for health care benefits
Given widespread doubts about retirement security, it is no surprise that the demand for generous and secure retirement benefits is rising. Overall, 62% of employees report being willing to give up some pay for a guaranteed retirement benefit, and more than half would sacrifice pay for a more generous benefit (Figures 8 and 9). This is consistent across both DB and DC plan participants of all ages, emphasizing that even younger employees are attuned to retirement planning — a trend that has taken off since we first asked these questions in 2009. Indeed, younger employees — regardless of plan type — are typically even more willing than older workers to trade off pay for more generous and certain retirement benefits (Figure 10).
Perhaps because health care is already taking a large bite out of monthly paychecks, employees are significantly less willing to sacrifice pay for either more generous health benefits or more predictable health costs. Demand for more predictable health benefits has weakened over the past few years, dropping from 42% in 2010 to 34% in 2013. Workers with chronic conditions constitute an exception: 40% would give up some pay for more predictable medical costs.
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Fewer employees are willing to pay more for health care benefits after they retire but before they become eligible for Medicare (Figure 11), with younger and lower-income employees the least willing to exchange current pay for postretirement, pre-Medicare health benefits. Workers might be less concerned about a health coverage gap because of expanded coverage options in the public exchanges; retirement saving and current medical benefits may seem more pressing issues.
Retirement plan generosity and certainty continue to trump other benefits
It’s important to understand employee preferences as they pertain to all benefits. When asked to rank various forms of compensation, workers overwhelmingly choose bigger paychecks (Figure 12). Other popular choices include generous retirement and health care benefits. Pay and more generous retirement benefits are the top choices across all groups, but younger workers are more likely to opt for bigger bonuses and more paid time off than for more generous health benefits.
Retirement guarantees rank sixth for employees 40 and older, which seems low given their stated willingness to sacrifice some pay for more secure retirement benefits. This inconsistency could reflect employees’ difficulty in assigning a value to a retirement guarantee compared with other, more easily understood reward components.
Another way of measuring the strength of employee preferences is by asking workers to choose between two reward options. Figure 13 highlights the trade-offs employees would make between combinations of base pay increases, more generous retirement benefits and more certain retirement benefits.
Older employees overwhelmingly value retirement benefits more highly than pay increases and demonstrate a strong preference for retirement guarantees over benefit generosity. Conversely, younger employees rank bigger pay increases more highly than more generous retirement benefits. But the desire for retirement benefit certainty is stronger than the desire for bigger paychecks among all age groups. Likewise, retirement guarantees outweigh greater investment freedom for workers of all ages (Figure 14).
Fewer employees are willing to give up pay for health care benefits. While workers would generally favor a more generous health care plan over a larger pay increase, they are less willing to trade a bigger paycheck for more predictable medical costs (Figure 15). Older employees prefer both health care plan generosity and predictable health costs over larger pay increases, with generosity slightly more appealing.
We see roughly equal numbers of younger employees attracted to more generous health benefits and wanting larger pay increases. But unlike with retirement benefits, where guarantees are favored, younger employees are slightly more willing to accept uncertain health care costs in exchange for larger pay increases.
When asked to choose between health and retirement benefits, employees seem conflicted. Moreover, nearly three-quarters of employees of all ages demonstrate no preference between benefit generosity and predictability (Figure 16). The only preference is that of older workers for retirement guarantees rather than more generous or more predictable health care costs, and the partiality is relatively weak.
Taken together, these findings, based on different survey questions, suggest employees are attracted to “better” retirement benefits — both generosity and certainty — but are somewhat reluctant to give up any of their current health care benefits to obtain them.
Employers are increasingly looking to enhance the value proposition of their benefits by offering employees more choices. The notion of greater choice is often viewed as instinctively appealing. However, these survey results suggest that employee demand for choice does not extend to a willingness to sacrifice any of the value of their benefits. When asked to choose between a wider array of benefit options and enhancements to existing retirement and health benefits, employees overwhelmingly favor greater generosity (Figure 17).
Employees are especially cost sensitive about their health benefits, and many would prefer a lower-cost plan to a wider variety of plan options, especially workers in poor health and participants in HDHPs. But in competitive market conditions, such as plans offered through a public or private exchange, employees might be able to access both additional choices and lower costs.
These results suggest that employees have been thinking harder about their finances and retirement plans over the last few years. Employer-sponsored benefits continue to play a large role in employees’ plans for the future, but many of these benefits have been curtailed or seem at risk of cutbacks. The corporate shift from DB plans to DC and other account-based plans has unsettled workers. Many grew up expecting the generosity and security of their parents’ DB plans and Social Security benefits, and view their own retirement futures as up in the air. Moreover, rising medical costs have prompted employers to shift a larger share of the premium and point-of-care cost burden to workers, many of whom were already feeling financially stressed.
While retirement and health plans continue to evolve, certain trends and attitudes have become evident over time. Workers express increasing satisfaction with their retirement plans but still worry that their retirement income will come up short. While employees rely on and value their health care plans, they are not happy about their higher health care costs, especially when the costs are consuming a significant share of their household budget.
Employees are not only willing to pay more now for a guaranteed retirement later, but they would trade pay for many other benefits — at least on paper — including retirement generosity and health care plan generosity and certainty. How much employees would actually give up for a guaranteed retirement income is uncertain, but the widespread yearning for a more secure employment deal — especially the retirement package — is undeniable.
The authors would like to thank Charlene LeBlanc, Billie Jean Miller and Koki Mori for their support in developing this research.