Employee Benefits Strategies

BENEFIT COST ANALYSIS

The average increase in pay rates has been modest in recent years. Given the increases in productivity, labor costs should be on the way down. However, labor costs continue to rise due to the dramatic increases in benefit costs.

According to the Bureau of Labor Statistics report, Employer Costs for Employee Compensation – June 2025, the average total cost of benefits in private industry is 29.8% of total compensation.

The Kaiser Family Foundation reports that between 1999 and 2005, health care premiums increased 11% annually, more than three times as fast as wages and inflation. However, since 2005, premiums have grown at an average of 5% each year, a slower rate but still significantly faster than wage growth most years.

Why the Rise in Costs?

This rise in benefits costs stems from two causes:

1. There has been a considerable increase in the number of benefits offered by employers
2. The cost of benefits themselves has risen dramatically, especially health care benefits

The steep rise in health benefit costs reflects the general increase of health care expenditures in the United States. This increase stems from the growing costs associated with current medical practices and the improvement in medical care from new technology and drugs. Longer life spans and a greater prevalence of chronic diseases is also responsible for rising costs as is high administrative costs. On the other hand, retirement costs have not been rising nearly as fast because of reductions in the type and level of retirement programs offered in organizations. In the past, defined benefit plans were most prevalent. Today, defined contribution plans, 401(k)s in particular, are the most popular form of retirement plan.