IS WHAT YOU’RE PAID what you’re really paid? Probably not. The compensation that you don’t see each payday has a tremendous impact on your financial security and your future standard of living—and should affect how much you save and how you invest.
Defined benefit pension plans can be the most valuable form of noncash compensation. Health benefits for active and retired employees are a close second—especially so because they’re tax-free compensation (and hence a huge revenue loss for the federal government). On top of that, there’s your employer’s contribution toward Social Security, plus any employer match in your 401(k) or similar defined contribution plan.
Noncash compensation is especially important for public sector workers. Bureau of Labor Statistics data show 62.6% of the compensation for state and local government employees took the form of wages and salaries, versus 69.6% for private sector workers.
Benefits should be a crucial consideration when weighing one job against another, and yet workers seem to undervalue them: 62% of employees couldn’t estimate how much their employers spent on health benefits, according to a HealthPopuli blog. Among those who could come up with an estimate, most weren’t confident in their guess. Some 23% calculated that the monthly spending on health benefits by their employer was below $500—less than half the actual amount.
Unfortunately, private sector employers have largely abandoned defined benefit pensions. According to the Pension Rights Center, only 15% of private sector workers participate in a pension plan. State and local government employees are much better off, with 74% enjoying pension coverage. But even here, the value of noncash compensation is underappreciated. Many public employees are convinced they’re underpaid. In truth, their mix of compensation is simply different, with more on the noncash side—and often more in total compensation. The differences are especially dramatic for federal employees, where total compensation can be as much as 53% higher than for their private sector counterparts.
What does all this mean for workers? It’s crucial to understand the value of your noncash compensation—and figure it into your retirement savings plan. If you’re covered by a pension, you may be able to save less, take more investment risk and perhaps retire sooner. If you’re also among the few who still have employer-provided retiree health benefits, you’ll be in even better shape. Such benefits can save you thousand of dollars a year, further reducing the amount you need for a comfortable retirement.
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles were Age-Old Myths, For Your Own Good and Choosing Badly. Follow Dick on Twitter @QuinnsComments.
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Benefits are valuable, although I didn’t begin to understand how valuable until my late forties. I was happy living in a small midwestern city, but a long way from family. I started looking for jobs within a five hour drive of home, so I could visit family regularly. I almost snatched up a job that was nearly perfect, until I looked at the salary and benefits. The salary was slightly lower, which I’d expected, but the benefits were the real problem. Health insurance would go from 80% employer paid to 50% employer paid. Mandatory retirement contributions would increase 3%, but the pension was less generous. The 403b had higher fees and poorer options. Then I noticed that no social security deduction was being touted as a benefit. That few thousand dollars less salary was about twenty thousand less total compensation. I resolved to spend a bit more on plane tickets to visit the family.