out into money wages or fringe benefits.9 In the medium to long run, the greater part of changes in fringe benefits tend to be matched by offsetting changes in wages: workers trade money wages for in-kind benefits. The major categories of fringe benefits are employer contributions to pension plans and health insurance and their payments of social security and Medicare taxes on behalf of employees. Employer-paid pensions are a form of savings (with tax advantages). But the CPI is a “one-period” index. Viewed as a COGI, it measures the average change in the price of currently purchased consumption goods. Viewed as a COLI, it is similarly defined to include only the effect on living costs arising from changes in the prices of current goods.10 A change in pension saving (i.e., future consumption) ought not to be treated as a change in the price index or cost of living associated with current consumption.

There are several arguments for not adjusting the CPI to take account of the benefits furnished to workers through employers’ contributions to the federal social security program. While it has been accumulating surpluses in recent years, the combined social security and Medicare (Part A) system is still essentially a pay-as-you-go system. Because of coming demographic changes, benefit payments under current law will begin to rise faster than revenues under current tax rates. It is unlikely that future changes in the present value of taxes and benefits will be closely linked to each other. Payroll taxes are still to a significant degree a public levy to finance a collective and continuing set of transfers from one generation to another. And, in any event, even if they were fully funded, they would represent another form of “forced saving” whose future consumption benefits are not covered in a one-period CPI.

Employer-provided health insurance benefits raise more difficult questions. Unlike pension contributions and employer-paid social security taxes, they (principally) provide a form of current consumption, namely, medical care plus the provision of risk insurance.

Conceptually, it is not clear whether or not employer-paid health benefits should be considered as an item of private consumption and included in the medical care weights of the CPI. We argued above for excluding public goods from the domain of the index, including locally furnished public goods. And the existence and generosity of health insurance benefits in compensation payments are also to some extent the result of collective decisions and, as such, share some of the characteristics of local public goods. In both cases, decisions are made collectively, but people have some ability to choose individually by changing their residence or their job. By analogy, employer-paid health benefits should be treated like a local public good and excluded from the index.


This is an oversimplification. Fringe benefits are tax-free forms of compensation. Hence, by taking a larger fraction of their compensation in the form of fringe benefits, employees can reduce their tax burden.


For a treatment of the conceptual issues involved in a multiperiod cost-of-living index, see Pollak (1989:196-197).

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