The Employee Pays for Everything

One of the great mistakes we all make (myself included) is to refer to benefits as paid for by the employer. Indeed, much of the tax law refers to "employer provided benefits".

This is quite misleading in that it establishes and reinforces the idea that employers pay for these benefits - when in all but the most extreme cases, this is never the case. The employee pays for benefits through a reduction in wages they would have othewise received.

Countless studies now show this to be true. Any of you that have worked with the challenge of annual double digit rate increases for health insurance premiums know that the decision comes down to how much wage increase will need to be sacrificed to pay the higher premium, or in the alternative, how deeply the benefits will have to be reduced to keep the premium at the same level. Either way the employee is the one that pays - not the employer.

I w0n't argue that there are certain exceptions to this - Google and Microsoft come immediately to mind. They can afford to pay the highest salaries and provide the best benefits and they must do so to compete for the highest level of employees. But they are the exception that proves the rule.

The tax code is the major driver behind this misleading situation. The tax preference for employer provided health care is now the largest single tax break available to Americans - exceeding retirement contributions and the personal mortgage deduction. It is the only tax preference that exclueds BOTH the employer and employee contributions to FICA, and is not taxed at any state or federal income tax level. (All of this while Medicare and Social Security are in financial crisis.) This is clearly a "behavior modifyer" that exacerbates the pressure on the demand side of the equation and drives up the cost of health care and health insurance.

President Bush's latest proposal goes right to the heart of the matter. While he retains the tax preference on an individual basis (not my favorite solution but at least he levels the playing field for those folks that don't have insurance provided by their employer), he eliminates it from the employer side of the ledger. This is a major move toward "Total Compensation" where employers simply pay people for the job they do. Under this proposal employees would have a great deal more choice and say so in how they spend their compensation. This proposal puts the focus squarely on the fact that employees earn all compensation - and redicrect it as they each see fit on an idividual basis. And yes, the FICA breaks remain but that is a topic for another discussion. The key here is that we get a much clearer recognition that employees pay for everything - one way or the other.