I do not believe the Heritage explanation for one simple reason -- as I understand the accounting rules (and I am a lawyer, not an accountant) the present value of expected pension obligations to future retirees goes on the balance sheet, not the income statement
So, for any year, with respect to labor, my current obligation is the present value of benefits promised to existing employees. I make appropriate actuarial assumptions (regarding how many will retire and when, what COLAS will be, how long they will live, etc) to calculate this number. I also must perform this calculation for current retirees (it is a little simpler since they are already retired). I then add the two numbers. That is my current balance sheet obligation for benefits. When Heritage says they are required to account for the present value of benefits to future employees in the current year, I believe they are referring to accounting on the balance sheet like this. But that says nothing about current per hour labor costs.
It is, rather, the income statement that performs this function. It should have the actual costs paid to current employees in wages plus health care payments made, plus payments made on pensions. For any year, the per hour labor costs (current plus legacy) could be viewed as the sum of these three numbers divided by the number of hours worked that year, which is how I believe the $70/hr was calculated. However, I believe that is misleading, because the payments to retirees actually represent deferred payment for work done long ago. Unless you also account for the hours that generated that deferred pay, you don't have an accurate gauge.
I am an accountant (CMA - Certified Management Accountant) and work in the Treasury function of a Fortune 500 manufacturing company. Although I don't currently calculate wages and benefits, I did have a role in the early 2000s where I did exactly that.
Per your bolded comment above, technically you are correct. However, what's not stated is that any costs over and above the
expected benefits must go to the income statement. Let me provide an example. Let me also say that I'm simplifying the accounting to get the point across, as one cannot teach pension accounting on an internet forum in 1,000 words or fewer.
Case 1 - You have an obligation (according to the actuaries) of $1M. You have a balance sheet account that's worth...dare I say it.... $1M. In that case you have the obligations covered, so there will be no costs on the income statement in that year.
Case 2 - You have an obligation (according to the actuaries) of $1.1M. Note the reason this is higher than Case 1 is that the obligation is an
estimate and must be recalculated annually...so something has changed. You have a balance sheet account that's worth...I see a trend... $1M. In this case, the company would have to "fund" the shortfall through the income statement to the tune of $100k for that year.
The result is that sometimes pension costs do go through the income statement...it depends on a variety of factors looked at by the actuaries.
Going back to the cost of an employee, I cannot speak for the Big3. However, I can say what I saw at our company. Our workforce is very similar in terms of required skills and part of the country (Midwest) that the Big3 operate in.
I will point out that we are self-insured. Why is this relevant? Because our health care costs are borne by all employees, so an aging workforce implies higher health care costs. In other words, the age of the workforce is a key factor in the overall wage/benefits picture. If 25% of our employees retired and were replaced by healthier (i.e. younger) employees, our health care costs would immediately decrease. This is not something very well explained in many stories, and I have no way of knowing whether the Big3 operate this same way or what their average employee age is....I just wanted to make it clear for my example below.
At our company in the early 2000s, the cost structure of having an employee on the books looked something like this:
- Wages
- Current health care costs (total $$ spent prior year divided by # employees)...this becomes the new "benefit" used for planning purposes.
- OPEB - Other Post-Employment Benefits (this is for future i.e. post-retirement healthcare and other costs such as life insurance) (See footnote 6 in the Heritage article)
- Unemployment compensation
- Holiday Pay
- Disability
- FICA (employee pays 6.2% and employer pays 6.2%)
- Medicare (employee pays 1.45% and employer pays 1.45%)
- Other (includes vacation costs when employees elect to have their vacation paid to them in lieu of taking time off, as well as other ancillary costs)
Our company did not include overtime averages, although some companies do.
I don't have exact figures for the above, and would not share them regardless, but suffice it to say that the total cost was more than double the wages only portion. In other words, if an employee made $25 in base salary, the other portions added together made up more than $25 in additional benefits.
Wages were less than half of the total benefit the employee derived by being employed.
There are some who don't believe it's fair to "count" the non-wage piece because the employee can't take it home. Well, I disagree. Why? Let's try a fictitious example. Let's say I'm offered two jobs.
Job 1 -
- Wages of $100,000/year with no benefits
Job 2 -
- Wages of $80,000/year
- Free leased company car with all fuel and maintenance paid
- Free uniforms with laundry service
- Free financial advisory services annually
- On-site health/wellness programs at no charge
- Paid-for membership to local health club
- Free parking in secure garage in downtown
- One pair of safety shoes paid for annually
- Free child-care at company-operated licensed facility
- $ per $ match on 401-k contributions up to 6% of pay
- Cash balance plan with 6% of wages contributed by company annually
- Tuition reimbursement for self and family
- Company-funded lunches in on-site cafeteria
- 5 weeks vacation (not paid, but you still get your $80k/year)
Guess which job I'm taking, even though I can't "take it home".