The Outlook for Pay Raises in 2018

Most large employers plan to boost salaries for 2018, but the average increase will be about 3%.

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If the low unemployment numbers make you think that you’ll finally get a bigger raise in January, think again. Most large employers plan to boost salaries for 2018, but the average increase will be about 3%—roughly the same as it has been for the past three years, according to con­sulting firm Willis Towers Watson. Many companies are using a backdoor approach to boosting employee compensation, however, by sweetening benefits that could improve your bottom line.

The modest increase in annual raises would seem to defy Economics 101. The unemployment rate has been below 5% since May 2016. Many companies are having a hard time filling positions, particularly for skilled workers. Typically, when the demand for workers grows, wages go up.

One possible explanation: Older workers are retiring and being replaced by younger workers who earn less, which drags down the aggregate increase. Another factor: Many employers are no longer offering equal raises. Willis Towers Watson found that employees who had earned the highest performance rating received an average salary increase of 4.5%, and those with an average rating received 2.6%.

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Better benefits. With open-enrollment season approaching, this is a good time to take stock of your total compensation, including health insurance, retirement benefits, paid leave and other benefits. You may discover that your employer has improved some of those perks, but they’re not always automatic.

For example, if you fail to contribute to your employer’s 401(k) plan, you could be leaving more money on the table than ever. The average employer contribution to 401(k) plans managed by the Vanguard Group rose to an estimated 4.7% of employees’ salaries in 2016, up from 3.9% in 2015.

In addition, you may have more options for the type of plan you invest in. Nearly 60% of large companies offered a Roth 401(k) plan at the end of 2016, up from about 50% in 2014, according to the Transamerica Center for Retirement Studies. Contributions to a Roth 401(k) won’t reduce your taxable income, but as with Roth IRAs, withdrawals are tax- and penalty-free as long as you’ve owned the account for five years and are at least 59½ when you take the money out. Roth 401(k) plans also offer a tax-friendly alternative for workers who make too much money to contribute to a Roth IRA.

To help workers cope with rising health care expenses, including higher co-payments and other out-of-pocket costs, more employers are offering tax-advantaged health savings accounts (see Employer Insurance Unfazed by Health Care Battle). The number of companies that offer HSAs through Fidelity Investments’ benefits enrollment program has increased by 38% in the past year. These plans are even more valuable if your employer kicks in some seed money. For 2018, employers are offering a median contribution of $650 per employee, up from $600 in 2017.

As Americans’ personal finances have grown increasingly complex, employers are rolling out programs designed to help workers manage their money. A survey of employees by Mercer Consulting found that the average worker spends about 150 hours a year worrying about money, resulting in more than $250 billion in lost productivity. Some 84% of large and midsize com­panies are offering debt management tools, student loan counseling and other “financial well-being” programs this year, according to a survey by Fidelity Investments and the National Business Group on Health.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.