Is There a Funding Crisis?
Chapter 2: The Economics of Retiree Health Insurance Benefits
Retirement benefits play an important role in the strategic human resource planning of public sector employers. Economic theory of labor markets predicts that employers will pay workers total compensation equal to their marginal value in production. To the employer, total compensation is equal to the total cost of hiring and retaining the worker. The theory of compensating differentials is based on employers being neutral sellers of benefits to their employees and workers wanting to buy these benefits from their employers instead of in the market (Rosen, 1974; Brown, 1980; Woodbury, 1983). From the employer’s perspective, one dollar extra spent on a benefit like health insurance should result in a dollar reduction in the cash wage offered to the employee. This tradeoff of more benefits for less cash does not need to be dollar for dollar if the benefits alter worker behavior in a way that reduces other costs to the employer, say lower turnover and longer job tenure. Employees are interested in the total value of working for a specific employer, including wages, benefits, and working conditions. Employees value both cash and benefits; however, a dollar of benefit cost to the employer may provide more or less than a dollar of value to the worker. For example, an employer may be able to purchase benefits at lower cost than the employee could buy the same item in the market; thus, the cost in lower wages of a worker buying health insurance from their employer is often lower than buying the...
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