Raising the federal minimum wage to $15 an hour would increase financial security for low-wage workers, but some argue it would also have a negative effect on businesses, including small employers. 

President Joe Biden included the Raise the Wage Act, a measure to expand the federal minimum wage from $7.25 an hour to $15 an hour incrementally by 2025, in his recently proposed $1.9 trillion stimulus package. While the proposal received support from those who said it would provide a livable income for the lowest paid workers and would result in better financial security—especially during the COVID-19 pandemic—others contend that businesses will likely have to make cuts to compensate for higher wages.

“Labor costs are one of the highest costs to all businesses—it could be up to 70% of mutual business costs if you include wages, benefits, payrolls and other taxes,” says Deirdre Macbeth, content director, regulatory, at WorldatWork, an association for human resources (HR) management professionals. “So, naturally, if you have an increase in your wages, that’s going to greatly impact your operating expenses for the organization.”

While some larger employers, including Target, Costco and Walmart, have pledged to pay their workers $15 an hour, opponents of the wage hike say small businesses are unlikely to be able to absorb the costs and could cut benefits or increase the prices of goods and services. The opponents add that this could create a domino effect: An increase in prices might result in fewer clients and decreased sales if a business is not competitive, so employers might choose to decrease their workers’ hours.

Voluntary benefits, such as retirement plan contributions, would likely be the first to go if businesses are looking to cut costs, Macbeth notes. “Retirement plans are naturally an area where employers—whether big or small—will look to reduce benefits when they have to, due to other financial circumstances, because they are not a mandatory benefit, so it isn’t legally required,” she says.

In such a scenario, employers would likely reduce or eliminate their match for a period of time to help offset additional expenses, Macbeth adds.

Lynn Dudley, senior vice president of global retirement and compensation policy at American Benefits Council, says employers should not have to choose between paying their workers a livable wage or cutting costs. She wants the federal government to provide incentives or assistance programs for smaller employers struggling with pay hikes.

Currently, employers that want to keep a retirement plan benefit can enroll in pooled employer plans (PEPs), a new type of plan that groups employers together to broaden retirement plan coverage while reducing benefit costs. The Saver’s Credit, also known as the Retirement Savings Contributions Credit, can also help eligible workers and taxpayers offset the cost of saving for retirement when their employers cannot do so, Dudley adds.

“There are a lot of actions that can be done,” she says. “If workers are more financially secure, they produce better work and, ultimately, the country does better too.”

Paying workers more would also automatically increase their contributions to one future savings vehicle—Social Security. In a new analysis, Michael Reich, a UC Berkeley professor of economics and co-chair of the Center on Wage and Employment Dynamics at the Institute for Research on Labor and Employment (IRLE), noted that there are benefits to a wage hike, including more tax money going to Social Security. According to his analysis, the Social Security Trust fund would see $12.2 billion per year in savings, as some older workers would delay retirement.

Macbeth agrees that more money going to Social Security provides an indirect benefit to retirement security for eligible recipients. However, while a higher minimum wage would give workers more income in their paychecks, it’s unlikely to be enough for them to be able to contribute money to other vehicles, such as an emergency savings account.

In a time when COVID-19 has left many works lacking financial security, the means to save is crucial, she says. “The reality is that workers who earn a minimum wage are struggling to make ends meet,” Macbeth adds. “They would likely use the extra income to cover their ordinary monthly expenses.”

Besides by increasing compensation, employers can boost their employees’ engagement by matching their contributions to a benefits program and adding financial wellness education. Dudley also says child care credits, access to retirement savings programs and adjusting Social Security projections are good additions to a financial well-being program. Offering such benefits eases the path for workers to save for the near- and long-term goals, she notes. 

“No one is going to deny that the ultimate goal is to get people more financially secured,” she says.