The Cost of "Fringe" Benefits Can't Be Ignored

What we used to call 'fringe benefits' can no longer be referred to as fringe, if they ever could. In fact, the cost of indirect pay is generally an adder of 50% or more to the cost of employment.

Or if you prefer to use a lower number than a 50% adder, the fringe costs are at least one third of the total. It's just how we choose to do the math. The result is the same either way. Fringes aren't on the fringe.

Hence, adding an employee to the payroll represents a serious commitment on the part of an employer. My guess is that the cost of benefits to the employer is a big part of the reason hiring is not picking up at a faster pace as the U.S. economy expands. And with these pretty much open ended 'fringe' benefit costs certain to escalate even more in the years ahead, the headwind for additional job creation will become more severe over time.

To take just one example, ObamaCare is a reality. Its costs will be much greater than estimated, both during the short term and over the longer term as well. That's just the way the government knows best gang does things. They lowball the estimates and then pass the costs along to insurance companies, employers and taxpayers. Of course, mandatory government programs such as Social Security, Medicare and unemployment compensation are also big employment cost adders as well.

But even after the politicians make every effort to disguise these costs as costs to be incurred by greedy insurance companies and uncaring employers, they're not, never have been and never will be. In the end, employees, consumers, taxpayers and We the People always get the bill.

Employers' Benefits Costs compares costs for public sector and private sector workers, as well as the various components of employment related costs:

"31%: The percent of employer costs that goes to paying for benefits.

Nearly a third of employers’ costs per worker goes to benefits on top of regular wages and salaries, and the share is even greater in some industries.

In December 2012, the most recent month for which detailed data are available, the average employer costs for each worker per hour was $30.84, according to the Labor Department. Of that total, $21.35 or 69% was for wages and salaries, the remainder went to benefits. The lion’s share of benefits’ costs is for health insurance, which on average makes up 8.5% of the total. That’s followed by legally-required benefits, at 7.8% of the total, which include Social Security, Medicare, workers’ comp and unemployment insurance. . . .

A greater share of state and local government’s costs per employee goes to benefits — 35% — compared with 31% for full-time private-sector workers. The costs to the government are greater per worker at $41.94 with $27.24 going toward salaries, while private employers on average pay $33.63 overall per worker and $23.22 on wages.

The makeup of benefit expenses is also widely different between private and government workers. Government benefit costs are higher for health and retirement contributions than their private counterparts, while private employers pay more in overtime and bonuses.

Though the disparity is clear, it is largely due to the types of jobs most common for state and local governments. More government workers are professionals, such as teachers, whose wage-to-benefit ratio is similar whether they are in the private or public sector.

Meanwhile, the average for all private-sector employee costs is dragged down by the large number of sales and service workers, who receive less in benefits. Service jobs in the public sector include police officers and fire fighters who generally have more generous benefits.

The disparity may narrow in coming years, as the new health-care law forces more employers to offer insurance to workers. Meanwhile, public pressure and difficulties with state and local pension systems could weigh on governments’ contributions to retirement and savings plans."

Summing Up

The cost of ObamaCare and the cost of funding retirement benefits will receive a great deal of attention in the coming years.

Health care is by far our largest financial problem to be solved, and the costs of retirement will explode as a result of our aging society. The demographics and the math are undeniable.

And of course, the cost of government will be scrutinized as never before as well.

So will the responsibility of providing for our old age benefits. Will it be 401(k)s or pensions, and will the money invested be in stocks or bonds?

All these questions and answers will be important ones for the general financial health and well being of our self governing society.

"Fringe" benefits will be no longer be considered as a sideshow, and should never have been one anyway.

Costs are costs, dollars are dollars, and we can't spend the same dollar twice.

If we spend it on health care, there's less available to be paid in salaries. And if we spend it on the public sector, there's less remaining to be spent and invested by the private sphere. And if we spend it on the oldsters, there's less remaining for the youngsters.

We the People are now in, and will continue to be, living in very interesting times. Very interesting times indeed.

That's my take.

Thanks. Bob.