Ending Fringe Benefits


This is more of a tax issue than a collective bargaining issue. In 2010, the federal government will lose $155 billion in revenue from not taxing employer contributions for medical insurance premiums and medical care and $44 billion from not taxing employer contributions to pension plans (source: U.S. Budget, Analytical Perspectives, page 301):

Estimates of total income tax expenditures (in millions)





Exclusion of employer contributions for medical insurance premiums and medical care





Net exclusion of pension contributions and earnings: Employer plans





Still, fringe benefits are a huge issue for unions and their struggling employers and recently, the "Cadillac" health insurance plans were a point of contention in the struggle to pass universal health care. Employer contributions toward employee health insurance are a form of compensation, but they have not been taxed since World War II. To the workers whose employers provide this benefit, it is a form of government subsidy. In the health care plan signed into law in March, everyone receives subsidized health care, and for the sake of fairness, everyone's subsidy was supposed to be approximately the same. The plan includes an excise tax on Cadillac plans to bring their net subsidy down to the level everyone else will receive. The tax was strongly opposed by organized labor, which sees no problem with its members getting a bigger health insurance subsidy than the rest of us. Their greed jeopardized passage of the plan and in the end, they succeeded in delaying the tax's implementation to 2018 and increasing the tax threshold from $23,000 to $27,500 for families and from $8500 to $10,200 for individuals.

I have several reasons for being against tax-free - that is, government-subsidized - fringe benefits:

  • The subsidy is unfairly distributed. It goes only to families that include a member whose employer provides fringe benefits.

  • They are at variance from a simple, straightforward income tax.

  • They make the price of labor difficult to ascertain. It is easy for job seekers to compare wage rates at several prospective employers; not so easy to compare total compensation when part is in the form of fringe benefits.

  • For unions that are always pushing for more, fringe benefits are a good way to conceal excessive compensation.

  • Pension programs, especially when they include health insurance, are a huge, long-term commitment, the cost of which is often underestimated, leading to bankruptcy, betrayal of retirees, and/or taxpayer bailout. This is from a 4/15/10 Time.com article, answering the question Could taxpayers really be on the hook for UAW pensions?

    Yes. GM could face a funding crisis in 2013 or 2014 when, under the current projections, the automaker will be required to make more than $12 billion in contributions to its pension funds to keep them solvent, according to the GAO analysis. Chrysler's estimated future pension obligation is $3 billion. If the companies cannot meet their funding obligations they may have to terminate their plans, and the financial responsibilities (up to government limits) would be assumed by the Pension Benefit Guarantee Corporation. The funding could easily become a serious challenge for the PBGC, which says it is now facing $168 billion in possible plan terminations across a range of companies, many of them auto suppliers. The PBGC is privately funded, but since it was created by an act of Congress and its board of directors consists of the Secretaries of Labor, Commerce and Treasury, it's possible that the U.S. Government would step in if the agency came up desperately short of funds. Of course, the Obama Administration could allow GM or Chrysler to defer their pension contributions, but there would likely be stiff resistance to another wink-and-a-pass for automakers.

  • The administration of fringe benefits is costly for the employer.

  • Tying health insurance and pensions to the employer makes moving from job to job more difficult. In other words, it reduces worker mobility, and that is not conducive to a free, healthy labor market.

With the new national health insurance program, employer-provided health insurance will continue, but there will also be provisions for workers whose employers do not offer it. With those provisions, it should not be necessary for any employer to provide it. The new program should allow us to get away from employer-provided health insurance altogether.

The other big fringe is pensions. Instead of mucking up the income tax with breaks for the whole range of retirement plans, why not have one, simple financial safety net for the elderly, and if workers want a richer retirement than that plan allows, let them figure out how to do it on their own, whether it is by maximizing earnings, being frugal and saving their money or by making wise investments. We've already got that "one, simple financial safety net": Social Security. If as a society we want retirees to have a more substantial income than Social Security currently allows, we can increase the Social Security benefit. We'll have to figure out how to finance those increased benefits, but that is true for all government-subsized retirement programs.

Life insurance is another employer-provided benefit that isn't taxed, and a lot of employees get it that don't need it. The purpose of life insurance is to protect your dependents if you die young, but a lot of employees don't have dependents and get the insurance only because it is free. The big winner here is the life insurance companies.

Then there is dental and vision insurance. My understanding of insurance is that you insure against catastrophic expenses, such as death of the wage earner, or hospitalization, or your house burning down. You don't insure against routine, low-cost expenses. You don't buy rent insurance, for example, because you know you are going to have to pay the rent each month - no surprises there. Likewise, you shouldn't need dental or vision insurance, because you know you are going to have your teeth cleaned every 6 months and you know you are going to need new glasses every couple years, and you can budget for it. Government-subsidized dental and vision insurance is good for dentists and optometrists, because people are less likely to cut back on those expenses, and it is really great for insurance companies, because they get business they wouldn't get if people had to pay the premiums out of pocket. Companies like Delta Dental, which specialize in these types of insurance, wouldn't even exist without the government subsidy.

And Delta Dental does quite well. In a July 1, 2007 article in the Lansing City Pulse, reporter Neal McNamara said that in 2007, Delta Dental

made over $1.4 billion in revenue, and compensated its top officers and board members over $13 million - including $3.9 million in salary, benefits and expenses for CEO Thomas Fleszar - compared to its total payroll of around $40 million . . . But in the wake of concessions between the United Auto Workers union and automakers General Motors Corp. and Chrysler LLC that eliminated retiree dental benefits, the company will lose about 20 percent of its business.

Apparently, dental insurance is not so important to those retirees that they would consider paying for it themselves.

So let's end this tradition of fringe benefits and let the worker's total compensation be a paycheck. If he was being paid at the market rate with the fringes, his pay without them will have to be a lot bigger.


Unions are Killing Michigan
The Wagner Act
What Economists Think
Why the Market Wage is Better
The Illogic of Collective Bargaining
Market Wage vs. Fair Wage
Imagining a Free Labor Market
Rights and Freedom
Destruction of the Middle Class
Employee Free Choice Act (EFCA)
Job Security
Collective Bargaining and Unemployment
Social Costs of Collective Bargaining
Ending Fringe Benefits
Democrats and Unions
Collective Bargaining in Government