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The big paycheck squeeze: The impacts of rising healthcare costs

By Billie Jean Miller and Steve Nyce | July 27, 2023

A key factor behind wage stagnation is the rising costs of healthcare, which have been depleting employees’ take-home pay for decades.
Benefits Administration and Outsourcing Solutions|Health and Benefits|Retirement

Many employees in the U.S. feel that they can’t get ahead. Headlines regularly highlight the struggles caused by paychecks not keeping up with the costs of housing, food and other basic needs. This problem is even more acute today in the face of the high inflation that is affecting many American families.

Total compensation, which includes wages and all benefits, has also been growing steadily and tracking increases in employee productivity. But cash wages have not kept up, driving a wedge between total compensation and wage growth. This drag on wages is the squeeze that Americans are feeling in their household budgets. What’s behind these trends?

Globalization and automation are often identified as key factors behind wage stagnation. The reality is rising healthcare costs are a major if not the primary reason many employees are struggling to get ahead. In 1980, healthcare premiums were 8% of take-home pay; by 2020, they had tripled to 25% (Figure 1). Higher health plan costs have affected many other aspects of employees’ rewards, squeezing the amount employers can contribute to merit increases and other important benefits, including employee retirement plans. The current trend towards higher healthcare costs increases, not seen since the early 2000s, will exacerbate the pain many employees are feeling today.

Figure 1. Total healthcare premiums as a percentage of take-home pay, fifth decile

Healthcare takes up 3X as much take-home pay as it did 40 years ago.

Total healthcare premiums for the fifth decile jumped from 8% of take-home pay in 1980 to 25% of take-home pay in 2020.
Total healthcare premiums for the fifth decile jumped from 8% of take-home pay in 1980 to 25% of take-home pay in 2020.

Sample: Full-time, full-year workers, ages 18 – 64, in the fifth decile of the income distribution, who worked at companies that offered health insurance
Source: Developed from the augmented CPS by WTW

From 2000 to 2020, the average full-time, full-year employee added a little over $12,000 to their annual total compensation. This reflects an annual growth of around 1.0% per year (adjusted for inflation). But health insurance premiums increased by more than 2.5% per year over the same period. Of the $12,000 added to total compensation, only 46% of that increase went to cash wages. The other 54% was spent on employer provided benefits, with the majority going to health insurance. If these trends continue into the next decade, the average employee will only see 31% of their compensation gains as take-home pay. And the situation is expected to be much worse for lower income employees, who are projected to only retain 14% of their compensation gains as take-home pay over the next decade.

Additionally, retirement contributions have suffered in the face of rising healthcare costs. From 2000 to 2020, employer contributions to retirement plans as percent of total compensation rose only 0.5 percentage points, from 4.9% of total compensation to 5.4%. Healthcare benefits took up four times more of the gains in compensation than retirement.

But the impact of rising healthcare costs extends beyond compensation. As healthcare costs have risen, the percentage of employees covered by employer-sponsored health insurance has fallen. From 1980 to 2020, there was an 8 percentage point decrease in the number of full-time, full-year employees with employer-sponsored coverage (including contract holders and dependents). This is partly due to a decline in the number of employees offered healthcare coverage, but many more are declining to enroll in employer-sponsored coverage when offered. And again, lower income employees have been hardest hit. In fact, coverage rates for Hispanic employees declined by nearly 20 percent between 1980 and 2020 (82% to 66%) and by 7 percent for Black employees (83% to 77%) over the same period. Clearly, there have been shifts in coverage over the past four decades, which shows that both employers and employees are responding to increased healthcare costs.

Rising healthcare costs have been a primary contributor to many Americans’ feelings of economic stagnation, particularly for lower-income employees. And too often this is not well-understood by employees. But employers recognize that rising healthcare costs can have negative impacts on employees, including worse outcomes due to deferring care, insufficient retirement savings and longer working careers, all of which can be disruptive to their workforce and its performance.

Employers have taken many actions to address cost challenges, including plan design changes and steerage to higher value providers, which have been successful in reducing inefficient member utilization. The issues employees are facing go beyond healthcare costs and employers are taking considerable actions to address the deeper issues around employee wellbeing. These include broader financial issues and retirement savings challenges about which employees feel most vulnerable. But until we can address the main driver of higher health costs – high healthcare unit prices – employees can expect further squeezing of paychecks and possible curtailment of other benefits in the future.

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Healthcare USA: The big paycheck squeeze PDF .4 MB

Director, Research and Innovation Center

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