Arnold Kling  

Collective vs. Individual Benefits

PRINT
Cost-of-Living Arbitrage, II... Environmentalist Forecasting M...

I have a new essay that argues that we over-estimate the value of collective benefits.


Contrary to my training as an economist, I believe that at least some of the preference that workers have for in-kind benefits reflects flat-out irrationality. Even without tax arbitrage (and, after all, something like half the population pays no income tax and therefore does not even participate in tax arbitrage), many workers would choose to receive $4000 in health insurance rather than take $5000 in salary, even though the latter would allow them to buy health insurance and have $1000 left over.

I go on to argue that people over-estimate the value of government-provided benefits in education, health care, and pensions.

For Discussion. In a market undistorted by tax effects, are there any rational reasons to prefer corporate benefits to straight salary?



COMMENTS (17 to date)
Don Lloyd writes:

In a market undistorted by tax effects, are there any rational reasons to prefer corporate benefits to straight salary?

In at least the short and medium term, the net subjective value of what is available to an individual may be larger or smaller than the package that is provided by an employer whose costs and opportunities represent a different universe.

Regards, Don

Donald Lacombe writes:

It may be the case that individuals prefer corporate benefits because that option a) takes the guesswork out of picking an insurance plan and b) can somewhat eliminate the paperwork headache. In a sense, people may prefer less choice to more choice simply because it is less costly when the choice is limited. The employee may believe that the company "knows best" and simply chooses that option because they do not have to invest the time cost of investigating alternative plans.

Eric Krieg writes:

It is all about risk aversion. You take on a lot more of the risk when you become responsible for your own health insurance and retirement. This is especially true with regards to the pension, which is about as riskless a benefit as you are going to find (your risk is that your income won't grow enough to count enough in the pension formula).

Boonton writes:

1. A corporation will presumably be able to pool buying power to get the best rates possible. Hence, it will be rational for employees to want their employer to hire negotiators to get the best deal possible. We see this happening for those outside employer provided healthcare. How many 'small business alliances' are there trying to use pooling to get a better deal?

2. As other said above, decisions are not free. While more choices is a good thing it does come with the cost of having to research each option to find the best one. For many people the return on spending more time researching their health insurance options is low since they will be happy to know they are 'covered' with something halfway reasonable. The employer then is actually providing two services. One is the insurance and the other is the implicit advice in narrowing down the array of choices to just a few. Insurance brokers, real estate brokers and so on are paid to do just this sort of thing for their private clients.

Bernard Yomtov writes:

I think you're oversimplifying a bit, Arnold.

At least some of the people who pay no income tax would pay it if they got their insurance premium added to their paycheck. And saying that half the population pays no income tax is not at all the same as saying that half of all workers who get health benefitspay no income tax.

Yur second point wold hold if individual policies cost the same as group policies, and were as readily available. They don't and they aren't.

Eric Krieg writes:

>>And saying that half the population pays no income tax is not at all the same as saying that half of all workers who get health benefitspay no income tax.

Which goes to show that the income tax exemption given to health benefits is middle class welfare. Workers without health insurance are more likely to be at the lower end of the pay scale.

Daniel Lam writes:


Prospect theory may be relevant here. People hate losses more than they enjoy gains. Receiving $5000 is a gain that resets their reference wealth level (the position of the 'kink' in their utility function). When they come to fork over the $5000 to the insurance company, it is felt as a loss more severely than the income was felt as a gain. Irrational, you bet.

Lawrance George Lux writes:

Americans are used to hiring Professionals to handle difficult tasks. They expect advocates to negotiate rates, they want advocates to insure their benefits are paid, and they want a demon to condemn if anything goes wrong. lgl

Neel Krishnaswami writes:

Daniel, thinking back on my own behavior, I definitely see irrationality, but the specific explanation you offer doesn't hold up.

When I was unemployed, I continued my old job's full-spectrum health insurance using the COBRA provisions. Then, a year later, I became a student again, and I had to choose a new insurance plan. I looked at the options, running from a minimal catastrophic health plan to a maximal (and pricey) everything is covered plan. I chose the catastrophic health plan, reasoning that I was relatively healthy and was unlikely to spend enough on medical care to justify the extremely expensive insurance.

Now, observe that the same logic held true after I left my old job: there was no reason for me to continue with the full coverage, since I could have shifted to a cheaper policy immediately after quitting my job. (I didn't have a choice of policies while working, so we don't have to analyze that.) Why didn't I switch immediately upon quitting? It could have saved me nearly a thousand dollars....

dsquared writes:

Probably because Arnold is assuming away the heart of the problem; the highly opaque nature of pricing in this field. Put simply, $4000 doesn't always buy you $4000 worth of health care.

Dave Schutz writes:

In a lot of families, salary goes into the pot. And then out of the pot, you pay the credit cards, kid's college fund, etc. And, of course, you keep the '95 Taurus running, because it runs. Boring. But, a snappy new car paid by the company? Renewed every two years? Free, so beyond criticism by the spouse? Ah.

The interests of the salary recipient are not always identical to those of the salary spender...

Mike writes:

I'm not sure that there is anything irrational here. I think the problem is that the decision is stated as a static choice problem when in reality consumer would have a dynamic orientation.

Simply put the missing element is that the with an employer program the consumer has some long-term protection. If the individual is on their own and runs into long-term chronic health problems then he needs to be concerned that the 4k health policy might suddenly become $10k or maybe $100k.

In other words the $1000 differential might be viewed as a reasonable hedge (sort of an insurance policy that preserves access to insurance)

JScottN writes:

I think that the role of recruiting needs to be mentioned. It is very eye-catching to see "great insurance, child care, etc." in a job opening. How would this be translated to salary? In our society you cannot discuss how much you can/do make, but you can talk about all the perks a company gives you.

Arnold Kling writes:

"Simply put the missing element is that the with an employer program the consumer has some long-term protection. If the individual is on their own and runs into long-term chronic health problems then he needs to be concerned that the 4k health policy might suddenly become $10k or maybe $100k. "

But there is risk in the other direction, which is that you could separate from your employer, and lose your health insurance as a consequence. Given the dynamic nature of the economy, that risk actually approaches 100 percent.

Neel Krishnaswami writes:

Hi Arnold, lose-your-job/lose-your-insurance is not a serious risk for many workers. This is because anyone working at a firm with more than 20 workers (or any firm, depending on the state) can elect to continue their health insurance under the COBRA or mini-COBRA laws. You have to pay for it yourself, but you won't lose your insurance while looking for a new job.

Bernard Yomtov writes:

"But there is risk in the other direction, which is that you could separate from your employer, and lose your health insurance as a consequence. Given the dynamic nature of the economy, that risk actually approaches 100 percent."

If you are suggesting that it's a good idea to move away from an employer-based system to one with greater portability of insurance, I agree. But, given the current system, I think, as I said above, your analysis fails to take into acount the realities of the health insurance market.

Boonton writes:
But there is risk in the other direction, which is that you could separate from your employer, and lose your health insurance as a consequence. Given the dynamic nature of the economy, that risk actually approaches 100 percent.

This risk is actually much smaller. Take full-time college and university professors. The 'risk' that they will change jobs at least once may indeed be near 100% but they will most likely go to a new job that has health insurance of the same or nearly the same quality.

The real risk is that a person with employer based health insurance will become unemployed and unable to find a job that offers health insurance. That exists but it isn't near 100%

Comments for this entry have been closed
Return to top