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  Trends and Challenges for Work in the 21st Century
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Opinions and views in these papers are those expressed by the author(s). They are not to be taken as expressions of support for particular positions by the Department of Labor. Please do not cite these papers without prior permission of the author(s).


Robert I. Lerman
Stefanie R. Schmidt

The Urban Institute
Washington, D.C.

III. Trends in Employer-provided Health and Pension Benefits and Families

The Decline in Employer-Provided Health Insurance

Employer-provided health insurance coverage declined sharply in the last decade. In 1988, 67 percent of the population had such coverage; in 1993, 61 percent did. The rate of coverage declined for every income group, with the sharpest decline (7 percentage points) for individuals with incomes between 100 and 200 percent of poverty and the smallest decline among individuals with incomes below the poverty line (Blumberg and Liska, 1996).

Most of the decline in employer-provided health insurance coverage is due to declining coverage for dependents, with the largest decline for children. About 18 percent of workers have no employer-provided health coverage, and an additional 5 percent have health insurance coverage for themselves but not for their families. Moreover, 30 percent of firms now require individuals to share the cost of family health insurance coverage, and many workers opt not to cover dependents when the price is too high. About 20 percent of firms also require individuals to share in the cost of their coverage, but employee costs for their own coverage are typically modest compared to the cost of family coverage (General Accounting Office, 1997a, 1997b).

For poor women and children, Medicaid has made up for some of the decline in private health insurance coverage. Since the late 1980s, the Medicaid program has been expanded to cover poor pregnant women and children who are not recipients of AFDC. As a result, between 1988 and 1993, Medicaid coverage expanded from 8.5 percent to 12.4 percent of the nonelderly population. Because of the Medicaid expansions, poor children are much more likely to be insured than poor adults (Blumberg and Liska, 1996). Some analysts have argued that the expansion of Medicaid eligibility actually contributed to the decline in employer-provided health coverage (Cutler and Gruber, 1996). But Medicaid only fills the private insurance gap for about 50 percent of individuals below the poverty line.

How will the decline in employer-provided health insurance affect the health status of the population? Individuals who are uninsured have much less access to health care than those who are insured, even adjusting for income and health status. Uninsured individuals are likely to delay or forgo medical care, even in the case of serious medical problems. They tend not to receive preventative care, so health problems are often much worse when they finally visit the doctor. In addition, when persons without health insurance coverage do receive care, doctors tend to perform fewer procedures. The uninsured receive better care in communities with public hospitals and clinics, as these institutions provide free medical care.

Does the lack of access to health care result in a decline in the health of uninsured individuals? A lack of health insurance coverage is correlated with poor health status and a decline in life expectancy. However, it is difficult to identify a causal relationship because health insurance coverage is endogenous; persons in poor health are less likely than healthy workers to find good jobs that provide health insurance coverage.

For many workers, the absence of health insurance coverage is only temporary. The median spell without health insurance is seven months, and 48 percent of spells of non-insurance end within five months. A significant minority, 19 percent, last beyond two years (Blumberg and Liska, 1996). An interesting unanswered research question is whether short lapses in health insurance coverage affect access to health care as much as long spells.

The Change in the Pension System

Over the last 20 years, the fraction of workers covered by defined contribution (DC) pension plans has increased rapidly, while the fraction covered by defined benefit (DB) plans has declined. In 1975, 13 percent of workers with pensions had DC plans as their primary pension, compared to 33 percent in 1988 and 42 percent in 1993 (Samwick and Skinner, 1998).

Some analysts are concerned that the switch from DB to DC plans will reduce workers’ retirement savings. Under DC plans, workers bear much of the responsibility for accumulating adequate assets for retirement for three reasons. First, contributions to DC plans are often voluntary. In a sample of workers from several large firms, only about 70 percent chose to participate in voluntary DC plans. On average, workers contribute about 6 percent of their salaries (Employee Benefit Research Institute, 1995).

Second, workers can control the allocation of assets in their DC portfolio. Many workers choose far too conservative investments, which dramatically reduce the value of their assets at retirement. About one-sixth of workers invest none of their portfolio in equities (Samwick and Skinner, 1998), and many of these very conservative investors are relatively young. In one dimension, workers’ investment strategies are sensible: the percent of assets in equities declines as workers get closer to retirement (Employee Benefit Research Institute, 1995).

Third, workers can choose to consume, rather that reinvest, the DC lump sum distributions they receive when they leave a job. Only half of those who receive lump sum distributions reinvest all or part of it into an IRA or their new employers’ retirement plan (Employee Benefit Research Institute, 1996b).

The lump sum distributions of DC plans have the advantage of making the pensions portable. If workers choose to reinvest their lump sum distribution, they suffer no penalty in retirement income from changing jobs. When workers change jobs, they suffer a substantial decline in the expected value of their DB plan income.

A recent paper (Samwick and Skinner, 1998) examined the retirement income yield for average pension recipients under representative DB and DC plans. The Samwick-Skinner model takes account of the reality that many workers will consume the lump sum distributions from DC plans when they change jobs and that many workers will continue to be conservative in their portfolio choice. Still, they find, somewhat surprisingly, that the average worker will have a higher retirement income under a DC plan than under a DB plan. However, workers at the lowest 10 percent of the retirement income distribution are projected to earn higher retirement income under DB than under DC plans. Although many DC plans do not adequately provide for retirement, neither did many DB plans in the past.

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