Benefit cuts may save employers money, but cost them talent

• Key Insight: Discover how benefit cuts trade long-term retention for short-term cost savings.
• What's at Stake: Higher turnover and productivity loss could weaken employer competitive positioning.
• Forward Look: Expect expanding benefits rollbacks as AI investment and healthcare inflation accelerate.
• Source: Bullets generated by AI with editorial review

Companies cutting benefits in response to economic pressures may be trading long-term retention and productivity for short-term savings.
That's according to Sarah Peterson, an attorney at Brightmine, a legal and HR compliance and workforce data platform, who said such moves are often perceived by employees as a reduction in pay and a signal about company priorities.

"When health care costs go up, retirement contributions shrink, or paid leave opportunities get scaled back, employees tend to experience that as money out of their own pocket, even if their salary hasn't changed," Peterson said. 

"Because people look at total rewards, not just base pay, it doesn't take much for a competitor with stronger benefits to start looking like the better deal. On top of that, benefit cuts can chip away at trust. Employees may start to wonder what's coming next, which makes them more open to looking elsewhere."

Those dynamics are already showing up in practice. Two large companies — Zoom and Deloitte — recently moved to scale back parts of their benefits packages as they respond to cost pressures.

According to Business Insider, Zoom reduced its paid parental leave, offering 18 weeks for birthing parents — down from 22 to 24 weeks — and 10 weeks for nonbirthing parents, down from 16. 

Meanwhile, Deloitte plans to reduce parental leave offerings in addition to scaling back or eliminating annual PTO, pension contributions, and IVF funding. These changes are set to take effect in January, Business Insider reported.

Investments in AI are also factoring into how employers spend on benefits. A recent survey from ResumeBuilder.com found that 54% of companies have or will reduce employee compensation to free up capital for AI spending in 2026. 

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The types of compensation affected by cuts include bonuses (61%), equity or stock awards (60%), raises (59%), benefits (53%) and base salaries (43%).

The effects of benefit cuts on retention can surface quickly, though they may not be felt equally across the workforce, Peterson said.  

"Employees who rely on those benefits are the first to feel it and the most likely to leave if the overall value proposition drops," she said. Scaling back benefits makes it easier for employees to walk away by lowering what's keeping them tied to the organization, while at the same time increasing the risk of burnout if support around health, time off, or balance declines. Over time, that combination can create a snowball effect: engagement dips, job searching ticks up, and turnover follows."

An affordability problem

Rising medical costs are also impacting employee benefit affordability. More than 75% of workers saw an increase in medical premiums this year, with some reporting spikes of more than 10%, according to a new study by LIMRA, a global insurance industry research and trade association.

Because of those increases, more than half of workers made changes to their benefits, including 16% who cut back spending on other benefits and 12% who lowered their retirement savings contributions. 

The impact was felt even greater among Gen Z workers, with nearly three-quarters taking some form of action when their medical premiums increased. Gen Z workers are also most likely to reduce benefit spending overall, according to the Benefits and Employee Attitude Tracker Study, which polled around 4,000 U.S. employees in January.

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"It is concerning that some workers, especially Gen Z, are reducing their 401(k) contributions due to rising medical insurance premiums," said Kimberly Landry, research director at LIMRA. "For a Gen Z worker earning a $50,000 salary and contributing 5% of their salary, reducing that rate by just 1% means saving $500 less each year. Over a 40-year career, that could result in at least $20,000 less in retirement savings before even accounting for employer matches, salary growth, or investment returns. Even small reductions in retirement contributions can have significant long-term effects."

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While 45% of workers now say they are very satisfied with their benefits, up from last year, LIMRA's survey found a significant perception gap: Employers substantially overestimate how well their offerings meet employees' needs. 

"When employers misjudge the success of their benefits programs, they'll be less motivated to make enhancements," Landry said. "This puts them at risk of losing talent to competitors with more comprehensive offerings."