Inflation and rising interest rates are the most significant factors currently impacting the U.S. economy. However, the current trends we are experiencing are not new or out of the ordinary. Historically, inflation has always increased after periods of mass currency printing. And historically, employee resignations have always increased during periods of high inflation.
We are currently experiencing a 40-year record high inflation rate, and the most recent report released by the Bureau of Labor Statistics showed a higher increase in the Consumer Price Index than originally anticipated.
The root cause of inflation is based on one core concept: more dollars chasing less products and services.
Prior to the 2 most recent quarters of negative GDP growth, GDP growth was increasing at a slower rate than previous years.
Inflation will increase until our productivity levels (GDP) “catch” up to the amount of new currency printed/created.
An overlooked factor that has particularly harsh backlash for employers, is the INVERSE relationship between inflation and unemployment rates. See the below chart for reference.
Source: Bureau of Labor Statistics
This indicates that the demand for labor will be significantly higher than labor supply. Historically, periods of high inflation also have an increased rate of employee resignations. The high demand for labor creates a competitive labor market which means employers need to have or create a competitive edge, which will be covered later in this newsletter.
We are now beginning to see an after effect of high inflation, which is a sharp rise in interest rates. 14 years of historically low interest rates, paired with the current inflationary market are strong indicators that interest rates will continue to rise for the foreseeable future.
Historically, interest rates rise at sharp levels after periods of high inflation. This is due to the need to devalue a currency during periods of high inflation. The most common monetary policy to do so is to increase interest rates. See below chart for reference.
Source: Bureau of Labor Statistics and Board of Governors of the Federal Reserve System
*Interest rates indicated in chart are nominally inaccurate and only overlap to show correlation
High inflation, low unemployment rates and an increase in employee resignations may exacerbate the need for additional business capital. Employees have a necessity to seek higher wages and employers have a necessity to be more competitive. If said employers do not have liquid capital, then acquiring more capital is “more expensive” due to higher interest rates.
According to the experts at the Society of Human Resource Management (SHRM), expanding employee benefits and implementing employee wellness programs are the competitive edge employers need, but only 12% of employers end up doing so.
- 1/3 of employees are currently seeking new employment specifically due to the benefits being offered/provided by their current employer
- 83% of employees are willing to take alternative roles that provide better benefits but lower compensation
- 95% of employees consider healthcare and insurance benefits to be the most important benefit offering(s)
- 76% of Millennials cited benefits customization as an important factor to increasing their loyalty to their current employer, compared to 67% of Baby Boomers
- We believe this is due to Millennials being the 1st generation that can stay on a family health and/or benefits plan until their mid-late 20s. Millennials could potentially be in the workforce for nearly a decade before they begin contributing to the cost of benefits.
A 2016 survey of 738 HR professionals from a randomly selected sample of SHRM’s membership indicate that:
- 50% of Human Resource experts expressed that wellness initiatives decreased company health care costs
- 40% of HR experts stated that wellness initiatives decreased unplanned absences
- Over 30% of HR experts claimed that wellness initiatives increased workplace productivity
- More than two-thirds of HR professionals said that health care, retirement savings and planning, and flexible working benefits will increase in importance to recruit employees
- 73% of HR professionals indicated that increasing their benefits offering will aid with recruitment
- Only 12% of HR professionals indicated that their organization altered their benefits offering(s) to aid in recruitment
- Conservative estimates indicate that increasing employee benefits and wellness initiatives will increase employee retention/average tenure rates by over 59%
All of the above seems like it would require capital to solve these issues. However, there is a way to provide employees better benefits and wellness programs without a capital cost. This can be done with a PTR (Payroll Tax Reduction) Plan.
A PTR Plan provides eligible employees the opportunity to:
- Reallocate tax dollars to provide themselves and their dependents additional benefits such as:
- Medical Gap Insurance
- Life insurance
- Term, whole life, and index universal life
- Disability Insurance
- Short and long term
- Accident insurance
- Hospital indemnity insurance
- Long-term care insurance
- Identity theft protection insurance
- Reduce or potentially eliminate out-of-pocket medical expenses
- Increase engagement, knowledge and understanding of their benefits
- Maintain the same net or “take-home” pay
- And have access to:
- Health coaches
- Financial coaches
This simultaneously benefits the employer and “frees” up capital by:
- Reducing the overall expense of payroll by reducing the organization's payroll tax burden
- Average reduction is between 10-20%
- Provides an opportunity to greatly reduce health insurance premiums
- Doing so with a PTR Plan does not reduce the amount of coverage employees have
- Doing so does not require the employer to pass on additional costs to employees
- Doing so does not reduce the amount of service or care employees will have
- Increasing employee tenure rates
- According to SHRM expanding benefits and wellness programs increases employee tenure rates by at least 59%
- Reduce the length of time job listings remain unfilled
- Reduce the financial and opportunity cost associated with employee turnover
- Is a steppingstone to Captive Insurance
- Captive Insurance is a form of business insurance premium recapture
- If a captive is in place, a PTR Plan can allow the employer to incorporate health insurance premiums into their current captive
TAX- To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
TAXES- This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.