Benefit Mandates Cause Unemployment
JULY 01, 1983 by HANS SENNHOLZ
Most people expect more from their work than wages. They seek additional benefits, such as a sense of purpose, accomplishment, appreciation, companionship, etc. They desire all sorts of things in exchange for their labor. In the broadest sense all these things are “fringe benefits.”
Psychic benefits have great economic significance as they may affect a person’s spirit, disposition, and attitude. They influence his will and power of work, his contribution to the production effort. A wise employer is keenly aware of the importance of psychic benefits which he grants with great generosity. They never impoverish the giver, but always enrich the lives of those who receive them as well as those who confer them. They cannot be calculated in dollars and cents although they affect personal productivity and income.
Fringe benefits appear on the production ledgers when they cost money. They provide additional remuneration to employees in the form of vacation and holiday pay, sick pay, the cost of pensions, and employer contributions to various benefit systems. These extra costs of labor are frequently overlooked in popular discussion, which is preoccupied with hourly, weekly, or monthly wages and salaries.
To obtain a true measure of production costs, businessmen must take all costs into account. To consider some costs and overlook others is to invite losses and failure. Employers cannot disregard the costs of fringe benefits, which amount to sizable proportions of total labor costs. They must be ever mindful of the fact that every penny of labor cost must come from the productive efforts and contributions of the workers themselves. There are no gratuities or transfer payments in the production and distribution process. Every participating factor receives an income that corresponds to the value of its productive contribution.
Many workers, unfortunately, look upon fringe benefits as “employer gratuities” that are taken out of business profits. There is no hourly, weekly, or monthly accounting and reporting of fringe benefit costs, which tends to obscure the fact that they are labor costs just like wages and overtime pay. Actually, it does not matter how the costs are allocated among the various benefit accounts, as long as the total costs of labor do not exceed the value of labor production. If total labor costs, for any reason, are made to exceed the value of a worker’s contribution, he is inflicting losses on his employer. He becomes “destructive” rather than productive, a “liability” rather than a productive partner, he becomes a candidate for “disemployment.”
The common failure to view fringe benefit costs as labor costs probably stems from the sphere of politics where transfer payments are popular devices. Government is made to serve as a giant transfer agency that seizes income and wealth from some people and allocates them to others as “entitlements” and “benefits.” If legislators can bestow gratuities through government, why should they not grant favors through mandates to business? No new taxes need to be levied, no costly bureaucratic apparatus of transfer needs to be established, the legislators merely issue a mandate and government agents enforce it.
The mandate of costly fringe benefits draws ideological strength and support from the precedent of past labor legislation that aimed at improving working conditions. Beginning in the 1830s and 1840s, some state laws regulated the number of hours worked by children. During the 1920s it became popular for state governments to regulate the working conditions for women. In 1938, finally, the federal government assumed the lead with the Fair Labor Standards Act, which not only imposed minimum wage rates but also provided for a 40-hour week, allowing for overtime work if paid at time-and-one-half.
Public opinion is fully convinced that all labor improvements are an achievement of the combined efforts of labor legislation and union activity. It credits humanitarian legislators and courageous union leaders not only with the phenomenal rise in wage rates, but also with the reduction of daily hours of work, the disappearance of child labor, the limitation of woman labor, and many other results. If legislation and unionism did have such powers in the past, they must have similar powers in the present. With courage and dedication they must be able to exact ever greater benefits from reluctant employers.
Persistent Political Errors
Unfortunately, there are political errors which, once they sway public opinion, become public virtue and policy. They may lend an age its singularity and hallmark that persist for many generations despite their ominous consequences. When future historians research our age they cannot help but be confounded by our undaunted faith in labor legislation and unionism that give our age a conspicuous characteristic: mass unemployment. They will be mystified by our steadfast refusal to see that neither government nor unions do have the coercive powers to improve working and living conditions. They did not have them during the 19th century, and do not have them in the 20th. The remarkable improvements were brought about by the formation of productive capita] that provided labor with ever more efficient tools and equipment. Labor legislation and labor unions tend to shackle productivity, hamper output and, therefore, keep society poorer than it otherwise would be.
Child labor laws and regulations of women’s working hours usually followed the improvements brought about by capital investment and productive technology. The legislators merely sanctioned what already had taken place. But in true political fashion they were always quick to claim full credit for the achievements of others, especially countless investors and entrepreneurs. Their vainglorious pretensions unfortunately persuaded many gullible fol lowers.
In some cases the laws and regulations actually pushed further than conditions allowed, which caused disruption and stagnation. It harmed everyone, but especially those individuals it meant to benefit. It drove many into idleness and poverty, or led them to ignore the law that denied their freedom to work. The underground economy was born on the very day the first restrictive labor law went into effect.
To raise the costs of labor by benefit mandate is to set into motion an array of adjustments and readjustments that redistribute the burden among all market participants. The reaction manifests an important distinction between two main categories of labor costs:
1. Contractual employer payments to employees or on their behalf. They include not only all items of cash payment and supplementary remuneration payable directly to employees, but also contractual expenditures on their behalf, including contributions to pension and other funds.
2. Mandated benefits that are exacted by political force on behalf of employees, including contributions to Social Security, unemployment and workmen’s compensation, disability benefits, and several others. They are meant to be “transfer payments” taken out of employer profits.
In the world of economic reality, both categories of benefits—the contractual remuneration and the mandated benefits—are derived from one and the same source: employee effort and production. Backed by the state apparatus of force the mandated benefits take precedence over the contractual benefits, which must adjust continually to the former, acting as a residual that can be paid after the mandates have been satisfied. The adjustment is a market process that shifts the costs of production to the factors that incur them. In particular, it shifts the costs of mandated benefits to the very beneficiaries by forcing them to suffer reductions in contractual remuneration. The shifting is painful in the short run, but beneficial in the end. It corrects the disarrangement prompted by the government intervention.
A Crucial Difference Between Old and New Benefits
The shifting process is the source of much economic confusion. Some observers look only at the adjustment process, others only at its consequences; some reflect only on old government intervention, others only on new laws and mandates. The distinction between the two rests on strict theoretical analysis and can be defined precisely. Old intervention is that government restriction or interposition to which the economy has fully adjusted. And we speak of new intervention when the economy has not yet adjusted to the new data, or is in the process of adjustment. The difference is crucial in any appraisal of the effects of government- man-dated benefits.
Legislation or regulation that aims to benefit some people at the expense of others, may be successful in the short run, but rarely is so in the long run. It causes an immediate reaction and readjustment of price, wages, and other costs that shift and redistribute the burden to all market participants. The costs of mandated labor benefits imposed on employers are shifted in time to the workers themselves. The shifting is a short-run process, the final burden to workers a long-run effect.
A boost in Social Security levies, unemployment taxes, Workmen’s Compensation Insurance levies, Occupational Safety and Health Act costs, or Employee Retirement Income Security Act premiums, constitutes a boost in labor costs, which reduces the profitability of business—a short-run effect.
Employers may react by seeking to offset the mandated increase in costs with reductions in contractual labor costs, such as take-home pay and fringe benefits. But such an offset may be resisted and rejected by the other contract party, the workers. After all, politicians and government officials have told them time and again—and the benefit law expressly stipulates—that employers must grant the benefits gratuitously. The law may even affix fines and imprisonment for employers who neglect or refuse to provide the benefits. Therefore, it is rather unlikely that employers would openly seek to reduce contractual labor benefits in reaction to increases in mandated benefits.
How Inflation Shifts the Burden of Employment Costs
In periods of inflation when periodic wage adjustments are made, employers may be rather successful in hiding the needed offset by offering lower raises than they otherwise would. In a year when inflation reduces the purchasing power of the dollar and, therefore, the real costs of labor by 15 percent, an employer may, without much resentment on the part of his employees, grant a 10 percent wage adjustment and allocate more funds to Social Security, unemployment levies, and other mandated costs. His real costs of labor may not rise at all. But his employees now must forgo a part of their real incomes in favor of their “gratuitous” benefits.
Other employers yet may succeed in offsetting mandated boosts in labor benefits by leading and exhorting their workers to greater effort and productivity. But such offsets are rather difficult. Workers may resist the exhortations openly aiming at shifting the burden of their benefit “entitlements” from employers to themselves. Most such offset attempts, therefore, may prove to be futile, which forces employers to brace for higher production costs.
Rising labor costs, like any other rise in production costs, may have different effects on three distinct groups of enterprises found in nearly every industry: a few are profitable, many are marginal, and a few submarginal.
When government mandates higher labor costs, the few employers who were earning genuine profits are forced to curtail their expansion or modernization projects. They may not need to discharge any workers, but may be reluctant to add more. The marginal employers who were just breaking even, earning the going rate of interest on the capita] invested, will be made “submarginal” by the boost in labor cost. Their yields now fall below the minimum rates needed to attract and preserve the necessary capital. They are forced to curtail their operations, close loss-inflicting plants, stores, or departments, and lay off some workers. The submarginal employers, who were earning meager returns or even suffering losses before the mandated cost increases, are further encumbered by the boost, which may push them over the edge into liquidation or bankruptcy. Output declines and the supply of goods and services is diminished. There is business stagnation—a short-term effect of the newly mandated labor benefits.
The Market Adjusts
The stagnation is keenly felt in many labor markets that lack the flexibility and mobility for the needed adjustment. It gives rise to mass unemployment that exerts a powerful pressure toward lower labor costs—until they have fallen to the rates allowed by the market. If the labor market is permitted to adjust and government abstains from any new mandates that raise labor costs, unemployment will gradually diminish until everyone willing to work can find his job.
But the long-term effects of the labor mandate will be felt as long as it remains in effect. They are less conspicuous than the short-term effects and difficult to demonstrate. After all, who can perceive that the mandated costs have been offset by a reduction in contractual .compensation, and that the worker himself now is laboring for every penny of benefit exacted from his employer? Who can perceive that he alone is paying for his Social Security benefits, his unemployment compensation, Workman’s Compensation, OSHA and ERISA benefits?
This inability to perceive the painful shifting process that allocates the costs of benefit mandates to the workers themselves may explain why there are so many advocates of ever more government intervention. They point at old benefits imposed ten or twenty years ago and fail to see any ill effects in the present. They have forgotten the months and years of painful adjustment, and never learned that, in the end, the workers themselves are bearing all costs.
Whether government intervention is old or new, it constitutes a substitution of political coercion for economic freedom of choice, and the rule of politicians over consumers, employers and workers. It is a substitution that rests solely on gross deception and economic ignorance. Surely, most American workers and their union agents are convinced that their benefit entitlements from unemployment compensation to ERISA bounty are exacted from employer profits. Therefore, they are applauding politicians who promise and legislate ever more expensive gratuities. If they actually knew that there are, and can be, no gratuities in production, that every penny of benefit is taken out of their own pockets, they would probably rise in anger and call an immediate halt to the mandates.
The benefit mandates of the 1960s and 1970s did not differ in substance from the labor mandates of the 1930s. Both forcibly raised labor costs, created disruptions in the production process, and in the short run, caused mass unemployment. In the long run, when all price and cost adjustments had run their course, they lowered the contractual remuneration of the intended beneficiaries. In the case of Social Security, which provides old-age, survivor, and disability benefits, as well as hospital insurance, government injected an additional transfer feature. It conferred generous benefits on the retirees and exacted the needed funds from the working people, many of whom were forced to suffer both the short-run and long-run pains of adjustment, that is, unemployment in the short run and lower take-home pay in the long run.
Old-age, survivors, and disability insurance covers almost all jobs in which people work for wages or salaries, as well as most work for self-employed individuals. The system is financed by payroll taxes levied on an employer’s taxable payroll; half the tax is deducted from the employees’ wage, and one-half is taken from employer income. While the first half merely reduces the employee’s take-home pay, the second half actually raises labor costs and thereby reduces the demand for labor. It causes unemployment.
Small increases in payroll taxes imposed on employers affect all workers, but “disemploy” only a small number. Employers may be able, through managerial effort and leadership, to make labor more productive and thus cover the additional expense. If profits permit, they may introduce more productive tools and equipment that raise the productivity of labor. Or, inflation may reduce the real cost of labor, which may permit employers to pay higher payroll taxes—provided that contractual labor costs are not indexed, which would prevent the decline in real cost. Where cost adjustments are not feasible, the boost in payroll taxes, no matter how small, must have disemployment effects. A mere rise of one-tenth of one percent of labor cost may cause the demand for .labor to decline by one-tenth of one percent or more, which in the American labor market would mean unemployment for 100,000 workers or more.
Boosts in Taxes
The frequent boosts in Social Security taxes have not always been small. In some years Congress raised the rate, in others the maximum wage base. At times both were boosted substantially. In 1950, the employer levy rose by 50 percent, in 1954 by 33 percent, 1959 by 27 percent, 1966 by 59 percent, 1973 by 35 percent, 1979 by 31 percent, 1981 by 24 percent. But no matter whether the boosts were large or small, they all constitute additions to labor costs. The magnitude of the boost merely determines the severity of the adjustment process and the measure of reduction of contractual benefits.
Social Security tax boosts obviously are not the only cause of rising unemployment; there are many other cost factors that may cause labor to become uneconomical and unemployable. In the depth of a recession, both federal and state governments may boost the unemployment insurance tax on employers, which raises labor costs and thereby further reduces the demand for labor. It inevitably aggravates and prolongs the recession. But it is also conceivable that the cost mandates of government are partially or completely offset by inflationary policies that tend to lower the real cost of labor. When one branch of government raises labor cost and another lowers it, it is difficult to foresee which branch will prevail in the end. The offsetting process itself is very disruptive as it affects different employers unevenly and disproportionately.
It is illogical and irrational to defend the boosts in payroll taxes with explanations and descriptions of the urgent needs of elderly people. Surely, their needs and wants play an important role in politics, which has made the Social Security System the largest transfer system ever devised. But regardless of want and need, payroll taxes levied on behalf of the elderly or for any other reason do raise the cost of labor, which in turn lowers the demand for labor. In the short run, they may cause unemployment; in the long run, they tend to lower contractual wages and benefits by the amount of the tax boost.
Before the Great Depression public opinion had lumped the unemployed and the unemployable together and made them the objects of charity. During the 1930s, under the influence of changing economic thought, public opinion began to adopt the concept that unemployment is a fault of the competitive private-property system, and therefore, a serious concern of government.
Unemployment insurance is based on the popular notion that the system makes a certain amount of unemployment inevitable. If it cannot be prevented, at least the workers and their families must be protected from the loss of income. And since it is not the fault of either employers or workers, but the natural consequence of the free enterprise system, the costs should be shared by all. In most countries, unemployment insurance is financed by contributions from workers, employers, and government.
In the United States, the Roosevelt New Deal went much further. It adopted the theory that employers, as the principal beneficiaries and advocates of the enterprise system, can control the rate of unemployment inflicted on workers. Therefore, they alone must pay the un employment tax levies. The rates were made to vary in accordance with the amount of unemployment that is attributed to the individual firm. Some employers may achieve comparatively low rates of taxation, others must pay higher rates, each based on his “experience rating.” The variation in tax rates is supposed to exert a restraining influence on employers and induce them to stabilize employment.
A Counterproductive Burden Upon the Workers Themselves
This New Deal theory of unemployment and the unemployment compensation system built thereon, have inflicted, and continue to inflict, incalculable harm on millions of American workers. When, for any reason, business turns down and unemployment rises, the payroll taxes imposed on employers increase the cost of labor, which further reduces the demand for labor and worsens the unemployment. The tax burden is highest on employers who suffer most severely from the business downturn, which keeps their labor costs up and their demand for labor down. In a lengthy recession, the tax levies are boosted substantially, which tend to aggravate and prolong the recession. In fact, it would be difficult to devise a more counter productive social program than the unemployment insurance tax levied on employers.
Unlike Social Security, which is entirely a federal program, the unemployment compensation system is a joint federal-state effort. The system was created by the Social Security Act in 1935, which imposed a payroll tax on all employers with eight or more employees in “covered” employment. The Act permitted an offset of 90 percent of the tax if the employer paid unemployment insurance taxes under a state law. This offset provision soon induced every state to enact its own unemployment insurance laws.
The system now covers about 97 percent of wage and salaried employment. Its outlays amounted to $25.2 billion in 1982 and are estimated to exceed $36 billion in 1983. Regular benefits (usually 26 weeks) are financed by state taxes on employers. State and federal administrative costs are financed by a federal tax on employers. In any state where the unemployment rate exceeds 5 percent for 13 consecutive weeks, the benefits are extended for another 13 weeks. The extended benefits are financed one-half from state taxes on employers and one- half from the federal tax on employers. A temporary program, Federal supplemental compensation (FSC), pays additional weeks of benefits to workers who exhaust their regular and extended benefits. As originally enacted, it provided for 10 additional weeks of benefits which were promptly extended to 16 weeks. Altogether, unemployed workers are entitled to 55 weeks of full benefits.
The Growing Burden of Unemployment Tax Rates
Under the Federal Unemployment Tax Act, as amended by the Tax Equity and Fiscal Responsibility Act of 1982, the federal tax rate is 3.5 percent on the first $7,000 paid to each employee of employers with one or more employees. The rate is scheduled to rise to 6.2 percent in 1985. The law allows a credit of up to 2.7 percent for taxes paid under state unemployment insurance laws, which leaves the federal share at 0.8 percent of taxable wages. The states are required to meet their own unemployment insurance costs. But they are permitted to borrow funds, interest-free, from the federal government. During lengthy reces sions, when the federal government can be expected to extend the duration of benefits, a large number of states is forced to borrow the needed benefit funds. The heavy payouts of benefits and the rising debt then force the states to raise both the tax base and tax rates on employers. Some states levy an additional “subsidiary” or balancing tax on all employers when the state’s unemployment compensation fund is low.
Unemployment insurance taxes represent a relatively small burden, less than one-third of the other Social Security levies. Until 1980 they averaged only 1.2 percent of total wages, but have been rising steadily ever since. As a proportion of net profits they may amount to large sums that lower profits substantially. During years of recession, when many businesses are operating without a net profit or even suffering losses, the unemployment insurance taxes are keenly felt. And as a proportion of labor cost for new employees who may prove to be only temporary, they may be utterly prohibitive. A worker who earns $5,000 in wages and then draws $2,500 in unemployment benefits, may cost his employer $7,500, which on a per-hour basis amounts to time and a half.
It is significant that the industrial states in the North and Northeast are the high-tax states, which also suffer from high rates of unemployment. Deep in debt to the federal government, they must levy such a high average tax on employers that little room is left for experience rating. Michigan exacts as much as 10.5 percent on $8,000 of taxable wage base; Minnesota and West Virginia charge 7.5 percent. Several states have lifted their tax bases considerably above the federal level: Puerto Rico taxes all wages, Idaho and Utah levy their rates on $14,400 of taxable income. Such exactions no longer constitute a small burden on the workers who ultimately must bear the costs through lower take-home pay and lower contractual benefits. And, worst of all, while the levies are rising they face the intense danger of disemployment.
Subsidizing Unionized Industries
Taxation according to experience rating, which is so popular with full-employment planners, actually may intensify the disemployment pressures. If the American automobile industry, steel industry, construction industry, the garment industry of New York, or any other unionized industry, were taxed to pay their full unemployment insurance costs, labor costs would be significantly higher, which would force many employers to go out of business. Therefore, state governments never dare to subject these industries to experience ratings. Instead, they are placing heavier tax burdens on all other industries, forcing them to “subsidize” the depressed industries. In the end, workers throughout the state must suffer lower net wages so that the army of unemployed from the unionized industries can be supported appropriately.
The significance of unemployment compensation must be sought not only in the rising burden of taxation that is limiting the demand for labor, but also in the benefits that are discouraging many workers from seeking employment. A Detroit automobile worker or Pittsburgh steel worker who loses his $40,000 job ($20 per hour) surely faces serious prob lems of readjustment to $10,000 in regular unemployment compensation, extended benefits, and supplemental compensation. But it is unlikely that he will seek other employment. His job opportunities at these union rates are non-existent outside the fold of his union shop. His labor productivity in the open market as a semiskilled worker probably does not exceed his rate of unemployment compensation, which makes it unlikely that he will look for employment as long as the benefits continue.
Workman’s Compensation, OSHA, ERISA, and EEOC
The Workman’ s Compensation laws in effect in all states hold employers liable for injuries suffered by workmen regardless of cause. They eliminate the element of legal negligence that is basic to Common Law, and establish the principle of “employer liability without fault.” They require employers to insure against potential financial liabilities to injured workers. In many states, the insurance may be provided by private insurance companies, in some states only by state-operated insurance funds. In a few states employers may bring proof of their financial ability to carry their own risk and provide “self-insurance,” for which ordinarily only very large firms can qualify.
The compensation system developed after 1917 when the U.S. Supreme Court agreed to the constitutionality of “employer liability without fault.” Until the 1970s its costs rarely exceeded one percent of payroll despite increases in dollar payments and extended coverage. But they began to rise significantly after 1970, when the Occupational Safety and Health Act (OSHA) largely ignored the workers’ role in accident and disease prevention and placed new demands on employers. Under the influence of OSHA thought and recommendation, the states substantially changed their workers’ compensation laws. Traditional exemptions for farm workers and domestics were eliminated, small firms were included, more work-related diseases were covered, and, above all, the benefits paid to workers were increased substantially.
A National Commission established by OSHA to examine the state compensation systems recommended a wide variety of reforms that would multiply the expenses and make the federal government the compliance guarantor. They would deny employers the right to appeal workman’s compensation agency decisions in court—except on questions of law. They would authorize the workman’s compensation administrator to regulate attorneys’ fees. They would establish a “retroactive benefit fund” that would adjust benefits for past inflation and bring them up to “current levels.” In 84 reform proposals the National Commission is pointing at the compensation system of the future. The message is clear: employers and workers beware!
Safety and Health Standards and Their Enforcement
The Occupational Safety and Health Act of 1970 requires of all employers that every job must be “flee from recognized hazards that are causing or likely to cause death or serious physical harm.” To that effect it directed the Secretary of Labor to establish an administration and adopt safety and health standards for all enterprises engaged in interstate commerce, except federal, state, and local governments. Employers are penalized if an unsafe condition has been discovered and cited by an OSHA inspector and the employer neglected to correct it in a specified time.
The standards established and enforced now cover 800 pages in the Code of Federal Regulations and number some 4,400. They range from 140-odd regulations pertaining to the use and construction of portable wood ladders to dozens of regulations on workers’ sanitary facilities. Do OSHA standards have a marked effect on the injury rate? According to many serious studies, they do not. Most injuries result from some behavioral problem or transitory hazard over which employers have little or no control. Only relatively few injuries involve a permanent physical hazard under employer control.
Notwithstanding OSHA and its army of inspectors, employers do not determine the levels of physical hazard in factories or workshops, nor do they ultimately bear the costs and reap the benefits of added safety. In the competitive enterprise system each factor of production must bear all costs incurred by its employment. Labor must bear all costs incurred on its behalf, whether they are contractual or mandatory, wages or fringe benefits, employee lavatories or cafeterias, earplugs or safety belts. Employers merely act as middlemen between workers willing to render a service at a wage and consumers willing to pay for the product or service.
Allocating Costs and Benefits
Through buying or abstaining from buying, consumers determine the sum total of costs which a businessman may incur in the production process. For its participation and contribution, labor receives its full share of the sum total. But workers determine how their share of costs, which constitutes their wages and benefits, is to be distributed among the several methods of compensation. They make this determination, without talking or bargaining, through their offers on the labor market. Businessmen competing for labor must give heed to the worker preferences or face higher labor costs.
If more workers prefer to offer their services to employers with greatest possible job safety, their wage rates tend to decline, granting profits to the safety-minded employers. Other businessmen competing for labor would rush to imitate the former in order to remain competitive in the labor market. If more workers choose higher wages, but are willing to assume greater on-the-job risk, they flock to employers offering higher pay but lower safety expenditures. Alert employers immediately perceive the worker preference that is visible in the employment cost of the last worker needed, the “marginal worker.” To ignore him is to face higher labor costs and invite business losses. In short, as businessmen receive their production orders from their customers, who set narrow limits to labor expenditures, so they receive their instructions on the distribution of labor benefits from their workers.
High Costs of Compliance
It is difficult to estimate the labor costs of compliance with OSHA regulations. A 1974 survey by the National Association of Manufacturers (NAM), which is probably exaggerating the case, estimated the costs for small firms (up to 100 employees) at $35,000, for firms with 101500 employees at $73,500, and for firms with 501-1000 employees at $350,000. Small businesses applying for loans from the Small Business Administration requested an average of $200,000 in order to comply with OSHA regulations. But no matter what the actual costs of compliance proved to be, and continue to be, they probably amount to tens of billions of dollars. OSHA contributed significantly not only to the rising unemployment and decline in real wages, but also to the extraordinary rise in goods prices throughout the 1970s.
Since the birth of the transfer state older Americans forcefully asserted their political rights to transfer benefits from younger Americans. They made the support for the elderly a primary objective of government policies—from subsidized health and housing, to special tax allowances, improved old-age benefits, and the Employee Retirement Income Security Act of 1974 (ERISA). The act meant to make it easier for them to qualify for pensions. But as is mostly the case with government intervention in economic affairs, it actually brought about the opposite of what it set out to achieve. It caused the termination of nearly 30 percent of all private pension plans, and imposed conditions that, in the end, may destroy the rest.
Before ERISA, the federal government had actively promoted private industrial pension plans. The 1942 Internal Revenue Act had made pension contributions by employers tax- deductible, made employee contributions tax-exempt, and offered deferred taxation of pension fund income until it was paid out as retirement benefits. With steeply progressive income taxation these deductions, exemptions, and deferrals provided powerful incentives for employer pension plans.
Private pension systems also multiplied as a result of radical government intervention in economic production. During periods of price and wage controls, as in World War II, the Korean War, and the Nixon era, many employers sought to circumvent the government controls by giving hidden wage increases in the form of pension benefits. Eager to remain competitive in the labor market, but prevented from raising wages, they introduced generous pension plans. Some funds actually meant to provide benefits for retirement, others were to be liquidated through distribution of assets after the controls were lifted.
After the passage of the Labor Management Relations Act of 1947, which made pension benefits a legitimate issue for collective bargaining, labor unions joined government in actively promoting pension systems. Facing frequent layoffs and chronic unemployment of their members, they directed their great strength toward gaining pension concessions for older workers in order to make room for younger unemployed members.
ERISA radically altered the basic nature of the pension system by placing government and its apparatus of coercion in the center of pension relations that heretofore had been completely contractual and noncoercive. Pension arrangements between a firm and its employees had been fringe benefits that reflected the choices and preferences of the contract parties. ERISA substituted mandates for contracts, and assigned additional benefits to employees at the expense of the firm’s owners.
Through a comprehensive set of rules governing certain features of private pension plans, ERISA made it easier for workers to acquire legal rights to pension benefits. It prescribed certain rules of eligibility and “vesting” of nonforfeitable pension rights. It made the employer, instead of the pension fund, solely liable for pension obligations and imposed minimum funding standards. To satisfy pension claims, the pension fund may claim up to 30 percent of the firm’s net worth. The claim has the same status as a tax lien, that is, it is senior to all other private corporate debt. Pension funds must be insured either with private insurance companies or the Pension Benefit Guaranty Corporation, an ERISA quasi- governmental agency. In case of pension default PBGC may force the firm into bankruptcy.
Private Pension Systems Jeopardized by ERISA
The genera] attitude of businessmen toward the private pension system is one of deep concern and uneasiness. ERISA has severely curtailed their freedom to contract and administer pension plans and substantially raised their costs. What used to be a widely used tool in personnel management has become a serious liability that may threaten the future of private enterprises. But looking’ beyond the burdens and dangers of the present, employers and employees alike may derive comfort from the certain fact that politicians, in Congress assembled, may command, but individuals may evade, go around, outwit, and thwart the command.
Many pension plans have been terminated, many more will never be launched. The funds allocated to pension plans may be given directly to employees who may invest them in individual retirement accounts or just spend them. Where the ERISA mandates do raise labor costs, contractual fringe benefits and take-home pay will, in time, be reduced by the amount of ERISA cost so that, once again, the workers themselves will bear the total costs of their era-ployment. Where such price and cost adjustments are impractical for any reason, they must expect lengthy periods of disemployment. For many elderly, who were supposed to be the main beneficiaries, ERISA may have erected the final barrier to employment and shattered the last hope for a pension.
The Equal Employment Opportunity Commission (EEOC) of the U.S. Treasury Department contributes its share of difficulties not only for the elderly, but also all other minorities. The Civil Rights Act of 1964 granted protected status according to race and sex; the Age Discrimination in Employment Act of 1967 extended the protection to the elderly. Later amendments to the acts further broadened government authority in all matters of discrimination.
EEOC guidelines aim to ensure that employee selection does not discriminate against any group on the basis of race, color, religion, sex or national origin. To that effect every employer is expected to engage the percentages of minority people that comprise the labor force in his locality. In a community where the population is preponderantly black, a plant must employ a corresponding percentage of blacks; in a Spanish-speaking community it must engage the proper percentage of Hispanic workers.
As any student of human action could anticipate, the EEOC strategy backfired immediately. It forced many employers to hire unqualified applicants just because they are members of a minority group and live in the community. Qualification, productivity and cost were relegated to secondary consideration, though these are the very factors that create jobs and assure economic survival in a competitive world.
To force companies to hire unqualified workers for any reason is to force them out of business. It cannot be surprising that EEOC contributed significantly to the exodus of business from the inner cities where millions of uneducated and untrained minority workers subsist on public assistance. To avoid the entire problem many companies have located new plants in largely white communities where minority workers face yet greater difficulty obtaining jobs.
Large corporations usually fear adverse publicity and, therefore, readily accede to the Commission’s demands. They may commit themselves to an affirmative action program with specific hiring quotas, but are quick to close the plant as soon as it begins to suffer losses. While their spokesmen may lay the blame on antiquated equipment or foreign competition, every observer knows full well that the plant was destined to close by orders of the EEOC.
False labor doctrines, held by a great number of people and enacted by the U.S. Congress, have wrought much evil. Many millions of workers whom the laws were supposed to benefit now are walking the streets in idleness and despair. Their suffering manifests anew that political power is no substitute for equity and justice, and no surrogate for the inexorable laws of the market.
1. Handbook of Labor Statistics, U.S. Department of Labor, Bureau of Labor Statistics, 1980, p. 62; also Budget of the United States Government, Fiscal Year 1983, pp. 4-18. Also H.F. Sennholz, Social Security—Is Reform Possible? (Grove City, Pa.: Public Policy Education Fund).
5. Joseph M. Becker, Unemployment Insurance Financing, An Evaluation, American Enterprise Institute, Washington, 1981; G.L. Reid and D.J. Robertson, editors, Fringe Benefits, Labour Costs, and Social Security (London: George Allen & Unwin, 1965).
7. The determination of risk and safety does not basically differ from the determination of the length of work day. Contrary to prevailing opinion, which credits courageous union lead ers and wise politicians with the gradual shortening of the work day during the 19th century, it was the workers themselves who determined the number of hours during which industry could operate most profitably. When wage rates rose due to capital formation and rising labor productivity, more workers chose more leisure over labor. They signalled their preferences to employers through cost differentials to which employers had to adjust. Labor union agitation for legislation aimed at restricting those workers in low-productivity occupations who still chose to work longer hours. Legislative restriction was designed to benefit union members at the expense of non-union workers.