How are you responding to “The Great Affordability Crisis?”

Monday, April 27, 2020
Blog

Our country has always bounced back from Depressions, Recessions, and other financial crises – so how do we help American families break free from the crisis they have been living in over the past decade?  Any way you slice it, it’s about to get worse. 

On February 7, 2020, The Atlantic released an article titled “The Great Affordability Crisis Breaking America.” It certainly caught our attention, as until now, we haven’t had a name for a decade as strange as the 2010’s were.   

The very nature of the Affordability Crisis makes it challenging.  Has it been sleeping?  Where did it come from?  Is it awakening, or is it here?  This crisis is something that swaths of Americans “feel, but perhaps can’t completely put their finger on.  The easy route is to blame stagnated wage growth, as people don’t feel that things are as affordable as they once were, but we’ll explore that isn’t the (only) answer. 

Our question for employers is how are you responding to employee concerns regarding this four-headed monster? 

Let’s also dismiss one common misconception… 

We pay our employees well.  Affordability shouldn’t be a concern for them.” 

It can be very easy for an employer to take offense when it comes to the affordability of their health plan premiums, much less their deductibles.  Having an open conversation about real-world affordability can be challenging.  This is certainly the case for employers who are doing a lot, like above average wage increases amid their own rising costs.  One would be surprised at how many conversations end here.  Let’s take a closer look at the numbers to understand why this world view may be out of focus. 

A recent study by Salary Finance revealed that 32% of 2,700 workers at over 500 companies run out of money before payday – even those earning over $200,000.  Surprisingly, the struggle of living paycheck-to-paycheck doesn’t look very different for someone earning $40,000-$54,999 from those earning over $200,000.   

Alarm bells should be ringing for many Employers.  How is affordability impacting your ability to recruit, and retain your talent? 

The very nature of employment is simple: employers make offers of employment to employees, under conditions that both parties are willing to accept, until the employee’s services are no longer needed, or the employee decides to pursue other opportunities.  We must ask, ithis affordability crisis also responsible for causing a more transient workforce?   

If an employee is feeling financial pressure in their own monthly budget, should they feel more tempted to consider opportunities to earn more?  In today’s economy, it may be easier for some to find a new job that pays $6,000 more per year, than it is to reduce their childcare expenses by $500 per month. 

One could argue that employees need to learn to better budget, however this is a short-sighted view.  Consider the fact for one moment that for an Employee earning $40,000 per year, their share of family health premiums toward the plan that their employer chose may consume upwards of 25% or more of their paycheck.  See where we’re going? 

We will touch on this piece, among others, as we look at the four main categories of concerns that were covered in The Great Affordability Crisis Breaking America.

Housing 

Millennials, who compose 50% of the workforce today, and on pace for 75% of the workforce by 2030, are at the front lines for housing affordability.  Unlike their Gen X and Boomer counterparts, Millennials haven’t had as much opportunity to cash-in on low housing prices following The Great Recession, or be in a position to cash-out at the peak in order to downsize as empty nesters.   

The 1970’s saw its own affordability crisis of stagflation, which was fueled by stagnant growth, high inflation, and high unemployment.  By the early 1980’s the United States had a recession on it’s hands.  By nearly all accounts, housing in the 1980’s was deemed largely unaffordable for many – including the parents of Millennials.  Interest rates of near 20% made long-term affordability a real challenge. 

Despite today being called one of the best times for home affordability, home ownership among Millennials is 8% lower than their parents at the same age, despite record-low interest rates, according to research from the Urban Institute’s Finance Policy Center.  For those millennials who did take the leap, 63% have buyers remorse given the ongoing responsibilities of maintaining their home, and also balancing other costs in an era of financial belt-tightening. 

It’s hard to save for a home, especially when you’re strapped for cash with an increasingly expensive rental market.  Nationally, rent is up 11.1% over the past 5 years, while hot metro markets are growing even faster due to increased demand with new jobs, and new residents, impacting their existing markets.  

With real wage growth varies between 0-2%, so the affordability of housing, especially in the rental market, starts to become evident.   

Housing is simply the tip of the iceberg.  The rest of the iceberg is what is actively working to sink many Americans. 

Healthcare 

Most individuals, especially businesses, are keenly aware of the rising impact of health care costs – both in terms of premiums paid, and out-of-pocket costs for their business, and their employees.  Employer sponsored health insurance premiums are up 27.7% while median household incomes are up 19.8%.  This is why many individuals have incurred net-negative wage increases, or stagnated wage growth, as the cost burden for health insurance continues to eat wages.  

Adding insult to injury, out-of-pocket costs for health care services are also increasing.  The average deductible has increased from $300 in 2000 to $1,300 in 2018, according to the Kaiser Family Foundation.  Annually, out of pocket maximum limits as defined by the Affordable Care Act are also increasing.   

In the end, one could argue that employers have boosted the total compensation of employees, depending on how much added exposure they are absorbing for increased health care costs.  For examplea family premium in 2010 of $14,000 subsidized at 75% compared to $20,000 in 2020 at the same 75% could be viewed as a $1,500 increase in total compensation.  However given that many employers are shifting costs for either premiums to employees, or simply placing more burden through out of pocket spending, has created a negative impact on wages. 

The takeaway is that understanding and tracking the net-impact to employees is challenging.  Employers should be utilizing a set of metrics or key performance indicators to track these changes year over year, and the impact on employee wages.  It is hard to convince an Employee that their wages have increased when their net paycheck is down.  We have some ideas on this at this link.   

Education 

The cost of higher education continues to outpace wages.  Below is a comparison of increases for the national average at various institutions from 2000 to 2019, according to this report at U.S. News & World Report.  

  • private National Universities have jumped 154% 
  • out of state tuition and fees at public National Universities have risen 181% 
  • in-state tuition and fees at public National Universities have skyrocketed 221% 

Nationally, in-state tuition is over $10,000 per year, and Private tuition is over $40,000 per year, on average.   

What does this mean? 

  • For parents who graduated in 2004, they may still pay paying off upwards of $160,000 in private school debt 
  • For that same individual who is paying for their education, and saving for their children, they should be budgeting over $400,000 toward their education at a similar institution. 

Education is one of the hardest pieces to tackle, and has a huge impact on future affordability issues, since these burdens are incurred prior to a career.  Like taxes and health care premiums, the money is taken before the employee receives their paycheck. 

Childcare 

Childcare is one of the stand-outs in the Affordability Crisis.  Individuals waiting longer to start a family (due to many of the above reasons) but it’s also a contributing factor why they are waiting longer to buy a home.  According to a 2020 report from Freddie Mac, Childcare expenses are as high as about half of the national median mortgage payment, and roughly 80% of the national median rent.  Imagine renting two properties at the same time.    

Virginia leads the nation for the annual cost of childcare coming in at $14,063 for infants, according to the Economic Policy Institute.   

  • This equates to 18.2% of a household with median family income, or 93.3% of income for a minimum wage worker.   
  • In fact, it’s 11.3% more expensive than in-state tuition for a four-year public college.  Virginia isn’t alone in this, as it’s the same for 33 other states, and the District of Columbia. 

The rising cost of childcare is why some are also leaving the workforce completely – which especially for mother’s can impact not only current earnings, but also long-term income.  It is estimated that in 2016, 2 million parents made career sacrifices due to problems with childcare, and the problem isn’t getting any better.

How does all of this fit together with the cost of other items? 

The truth is that these are just four of the standouts.  The chart included here exposes these items as the largest increases, but not to be lost is that these changes in cost are also based on a higher starting price.

What can Employers do help? 

What if part of the answer lurked within a top 3 business expense for many employers?  The first place many employers should choose to start is with their employer sponsored health care program, for four simple reasons: 

  • Health care eats wages and directly stagnates wage growth – assuming the premise that employers would have placed these funds toward wages, instead of funding rising health insurance premiums
  • Employees are shouldering a larger portion through their payroll deductions
  • Additionally, employees are paying a larger sum out of their pocket – whether paying with post-tax dollars, or through tax advantaged mechanisms like Flexible Spending Arrangements (FSA), and Health Savings Accounts (HSA). 
  • By optimizing a health program, an employer gains new-found flexibility to revinest in their employees through lower premiums, lower out of pockets, and new programs to alleviate the affordability crisis. 

If you chronicle the history of employer sponsored benefits, there are many reasons as to why an employer chooses to provide benefits to employees.  In looking at health care for example, prior to the Affordable Care Act, there was no federal mandate to extend benefits.  For decades, employers leveraged benefits as a means to recruit and retain employees – however one must look deeper. 

The very principle of benefits is to provide a sense of financial security to Employees – yet rising costs in nearly every area of life, combined with stagnant wages, have eroded security and given rise to angst when it comes to these items, and more.  We must ask, is there a benefit to your benefits program? 

Employers have attempted a litany of point solutions in order to help keep revenue from leaking through their health plan.  Here are just a few: 

  • Changing insurers 
  • Doctor Network changes (PPO’s, HMO’s, POS’s, EPO’s, etc) 
  • Consumer Driven Health Plans 
  • Qualified Consumer Driven Health Plans (HSA’s) 
  • Health Reimbursement Arrangements 
  • Wellness Programs and Biometric Screenings 
  • Health Risk Assessments 
  • Telemedicine and Virtual Care  
  • And the list goes on… 

The truth is that in many cases, the leaking hasn’t slowed, and in fact, it has simply bled over to employees.  One needs to look no further than the rise of interest free loans offered by Employers to help offset health care costs – organizations like www.ripmedicaldebt.com or the countless number of GoFundMe drives that are set-up to help those struggling with health care bills.   

At the end of 2019, the Washington post published A Stunning Indictment of the U.S. Health Care System, in one chart which illustrated that in a Gallup survey 25% of Americans reported delaying or avoiding care for a serious medical condition due to the cost of treatment. 

To this end, we pause to ask employers whether the benefits they provide their employees create a sense of financial angst, or financial relief? 

The moral of the story is that employers should consider speaking with an expert about their options, since new solutions are available to actually reduce the cost of health care expenses, without creating a negative impact for employees. 

When it comes to education, employers have long supported employees to continue to grow their skillset through continuing education.  For years, employers have been supporting employees through tuition reimbursement programs.  Under these programs, the employer sets clear parameters as to how much they will reimburse toward ongoing education, what types of education qualifies, and what strings may be attached.  For example, an employer may make available $3,000-$5,000 per year toward a Master’s Degree.  Many of these can be a good deal for employers as a “golden handcuff,” however this investment may be short-lived, especially if it is not paired with future growth opportunities at the organization, and a bigger paycheck is calling to the employee. 

The challenge is that in this process, many employees took on even more debt to cover these costs, on top of existing student loan debt.  Given this, can it perhaps make more sense to alleviate the burden of those carrying debt, so that they can invest in other areas of their life?   

Some employers think so.  Student Loan Forgiveness programs are on the rise, but Employers are also making progress on their own.  Some employers have resorted to private letter rulings from the IRS, to apply existing costs/benefits, such as retirement funds, in order to help offset the student loan debt for their employees, like Abbott Labs did in 2018.   

This is a great example of how employers like Abbott have taken a step back and applied flexibility to allow employees to divert existing funds toward more specific needs.  This sort of a holistic view, as well as agility, will become even more important in coming years. 

What about housing, or childcare? 

These are perhaps even more challenging to help address, however there are still answers that progressive employers have already implemented.  

Thanks to technology, more employers are extending the opportunity for employees to work remotely.  This means that not only does an employee save on transportation expenses, but for businesses headquartered in a high rent metro area, employees may find more affordable housing at a distance that would normally not lend itself to commuting to an office. 

Employers should be doing several things in response to these trends: 

  • Conduct a business operations review to identify potential options that would allow individuals to work remotely.  For example, a business may determine that one role can support the business remotely, but they may not be ready to let go of control just yet.  In this case, they may consider a rotating work from home option.  Under this arrangement, two employees are chosen, and they work even/odd days from home, and the others they would report to the office.  In a situation like this, office space (which often comes at a premium) can also be maximized. 
  • Illustrate the full value of working from home.  Total compensation and reward statements are nothing new, but many employers are missing the boat for calculating the money saved on transportation expenses when conducting these reviews. 
  • Consider options for a work-from-home stipend, or a stipend toward a remote shared office space.  The money saved on office space can be shared with those who work remotely, or utilized toward a shared-office space, which can help them to break away from the home, and even collaborate with other like-minded individuals, and still have a sense of community. 

This can even have other impacts when it comes to childcare.  By saving time on commuting, this can create the opportunity for more time with family, and lowered childcare expenses.   

Additionally, if the flexibility exists to work remotely, is there also an opportunity to allow for flexible scheduling?  If an individual is permitted to begin their work day at 3AM, and work until their children are awake, take their children to childcare for a half a day, and then pick them up at 1PM, the employer should be netting a full day’s worth of productivity, however the employee may have just cut their childcare expenses in half.  For someone making $50,000 per year, this is akin to a ~14% pay raise, assuming their child-care went from $14,000 per year to $7,000 per year. 

The affordability of childcare is also in correlation to the availability.  This is why solutions for back-up daycare have been on the rise for more than a decade.   

In 2019, a group of nearly 2000 mothers who worked for Amazon began to take matters into their own hands.  They called themselves Momazoniansand they were discouraged by the number of their coworkers that were leaving the workforce due to childcare issues, they called for Amazon to subsidize a back-up day care benefit, given these concerns. 

There are certainly a long list of challenges for most companies, and no two solutions will be the same, but for most firms this may lend food for thought when it comes to feasibility and piloting solutions. 

Conclusion 

These are just several examples not only the issues American working families are grappling with, but also the solutions that Employers may consider to help alleviate these burdens. 

Helping employees in these areas can also create a positive impact on workplace productivity.  Financial stress is a leading driver for a disengaged workforce. 

Traditional employers will continue to give employees a paycheck, however progressive organizations that will win the war on talent will teach their employees how to maximize a paycheck.  We call this a Distilled Concept. 

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