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Most contracts cover more than one year, with three years most common. Some contracts provide for wage reopeners during the course of the agreement, especially when cost-of-living agreements are not included. Where management seeks to eliminate them, unions usually demand shorter contracts. Evidence regarding the effects of contract length on other outcomes is relatively sparse. Longer contracts are more likely to have COLAs to insure employees against the uncertainty of wage changes, especially when inflation rates at the time of labor negotiations are relatively high.

Employers try to avoid one-year contracts because they believe such contracts lead to more strikes, more contract administration problems, lower employee morale, and higher and more unpredictable labor costs. However, longer-term contracts may be more difficult to negotiate when the parties are involved in an uncertain environment. New agreements were more difficult to negotiate when a long-term agreement was expiring in conditions where foreign competition was great; where capacity utilization, selling price of the company’s products, and the rate of vacant positions varied substantially during the contract period; where buyer or seller concentration in the industry was high; among larger employers; and during periods of high inflation.

The pattern of employment by occupation in the United States has also changed markedly over time. Major changes in the white-collar area have included increases in professional employees and clericals. The proportion of people working in blue-collar occupations, in the aggregate, has not changed markedly over the course of this century, with most of the loss from agriculture being redistributed in the blueand white-collar areas.The blue-collar occupations saw an increase in the proportion of operatives through 1950.

Then a long-term decline in the use of laborers and an increase in service occupations occurred. These trends for the blue-collar labor force are consistent with the peaking of labor union penetration in the early 1950s. The fall-off in the proportion of employees in lower-skilled blue-collar occupations is consistent with the decline in union penetration in the labor force.

Impro-Share is an individually oriented plan tying improved performance to an individual’s pay. While consultative management is suggested in the plan, union participation is minimal except through a bonus committee responsible for determining some of the aspects of the bonus formula. The bonus formula is somewhat complex, but the result subtracts the actual hours an employee works from the “base value earned hours” of his/her productivity. If the result is positive, the employee’s share (say, 50 percent) is divided by the actual number of hours worked to obtain a bonus percentage. For example, if an employee worked 1,000 work hours during a period and the base value earned hours were 1,100 with a 50 percent share, the Impro-Share bonus would be 5 percent.Impro-Share allows the organization to pinpoint incentives toward specific jobs or groups and decreases competitors’ ability to determine wage issues costs based on bonus formulas. However, employees have difficulty calculating what they will receive.

The retirement plans discussed in this chapter-qualified pension plans, individual retirement accounts (IRAs), and tax-sheltered annuities (TSAs)-provide many benefits. The most advantageous feature is that all contributions made to each plan are tax deductible. In addition, these plans provide for tax-free accumulation of assets, so that nothing is taxed until the funds are distributed. With these exceptional tax benefits, financial planners will typically seek conservative investments that provide a realistic yield for such plans. Selecting a conservative vehicle is important because these assets will comprise part of the client’s foundation for retirement. If the foundation is eroded due to the loss of principal or purchasing power, there may not be sufficient time to replace the lost funds. Although planners cannot guarantee the return of principal or yield, they can recommend low-risk investments that minimize potential losses.

The key to selection is long-term growth through steady income or asset appreciation. Consistency in investment performance is more important than sporadically high rates of return.

These plans should not involve investments that produce significant deductions, such as through depreciation or investment tax credits, because the benefits cannot be used in taxdeferred accounts. For example, a $2,000 IRA contribution produces a $2,000 tax deduction. If the IRA is invested in a highly leveraged equipment leasing program, no further deductions, such as for interest expense or depreciation, or any investment tax credits can be taken. Therefore, these additional tax benefits would not be utilized. Ordinarily, high write-off programs produce high risk, which makes them unsuitable for pension plans.

It would also be inapproprite to select investments, such as municipal bonds, that provide tax-free income. There would be no advantage with these types of bonds, because pension plans already accumulate income tax-free. Moreover, the disadvantage in choosing municipal bonds is that the distributions would be taxed. Thus, a traditionally tax-free vehicle would be subject to taxation when the funds are disbursed.

Further, an investment that produces long-term capital gains is not better than one that produces an equal level of ordinary income, because most distributions from pension plans are taxed as ordinary income. (The exceptions are noted later in the chapter.)

The tax advantages as well as the supplemental income they provide at retirement make each of these plans an excellent choice for helping a client reach financial goals. The tax/income combination is rarely surpassed by investments outside of this protective umbrella. Consequently, caution must be exercised in selecting investments that will preserve the client’s assets, as well as provide a reasonable rate of return. Get-rich-quick schemes are not appropriate under this umbrella.

Investments planners may wish to consider in funding pension plans include: government securities, conservative stocks and bonds and real estate mortgages, as well as insurance annuities. The values of these investment vehicles may fluctuate, but these investments minimize the risk of loss.
A final consideration in choosing an investment for the plans discussed is liquidity. A certain portion of the assets should always be in liquid investments. This will cover any distributions that have to be made either prior to or at retirement.

Thanks to congressional action and mass media advertising, the IRA ( Individual Retirement Account ) is the most popular pension plan. Major aspects of the IRA which planners must understand include: who may participate, maximum contributions funding, distributions, and termination.
Participants, Anyone who has earned income may contribute to any IRA. The income must be salary, wages, alimony, or net taxable income from a business. If the income is subject to Social Security taxes, it qualifies for IRA contribution purposes. One noteworthy exception is a self-employed person who employs his or her spouse.
For example, if a wife hires her husband and pays him a salary, the amount paid is not subject to Social Security taxes. However, the husband’s wages are taxable and can be used to contribute to an IRA. Income from savings and investments do not qualify.

Maximum contribution and funding. The maximum sum that can be placed in an IRA is 100 percent of qualifiable income up to $2,000 annually. For a married couple with both spouses working, the maximum is $2,000 in each account, for a combined total of $4,000. With a nonworking spouse, the total for couples is $2,250. This can be allocated in any manner between the spouses as long as each account has a minimum of $250. The full amount does not have to be funded, and future contributions may be skipped whenever desired. However, excess contributions are subject to a 6 percent penalty. For 1985, and thereafter, divorced individuals may include their alimony payments for contributing up to $2,000 to an IRA.

The IRA must be funded by the due date of the tax return, which is April 15. The IRS now allows taxpayers to claim the IRA deduction and submit their return before they make the payment, as long as the account is funded by April 15.

Distributions. Individuals may receive a distribution from an IRA once a year. The distributed amount can be placed in another IRA within 60 days without being taxed. The IRA custodian, usually a bank or a trust company, provides an important service in any distribution. The custodian must record all transactions and report any distributions to the IRS. The custodian is also required to withold 10 percent of the distribution unless the taxpayer informs them not to do so. The withholding would be especially inappropriate for those who are completing a tax-free rollover (an exchange of funds from one IRA to another).

Taxpayers may move IRA money from one custodian to another-never receiving the funds-as often as they wish. This is a nontaxable transfer. If clients withdraw their money from an IRA, the amount withdrawn is taxable. A 10 percent nondeductible penalty is levied by the IRS if the distribution is made before the IRA investor reaches age 591/2. There is no penalty if the funds are withdrawn due to disability or death of the taxpayer.
Terminations. IRA accounts may be disbursed when an individual reaches age 591/z without incurring any penalties. The money received is taxed as ordinary income regardless of the investment vehicle used for the IRA. The year after IRA investors become 701/2, they are required to withdraw amounts prescribed in IRS actuarial tables. For example, Roger is 701/z on December 1, 1985; he must begin a systematic withdrawal from his IRA no later than December 31, 1986. (Those who are married may choose the joint-survivor actuarial table.) Ignoring the withdrawal requirement will cost a taxpayer a penalty of 50 percent of the excess amount remaining in the account.

Miscellaneous rules and regulations. There are several additional considerations involving IRAs, such as:

1. Investors may use a variety of investment vehicles to create an IRA, the exceptions are hard assets, tangibles, and art.

2. Some states have not conformed to changes in federal tax laws so that an IRA is not deductible on these state returns.

3. Borrowing from an IRA or using it as collateral is prohibited.

4. Individuals cannot be their own custodians.

Many people are irritated by advertising pushing IRAs and showing a million dollar value in the account in 40 years. These ads emphasize the wrong concept. They overlook the needs of people age 50 and over, who do not have several decades available to accumulate assets. Rather, clients must be aware that, if money is not placed in an IRA, they are going to be paying more taxes. Should clients lack sufficient funds to make an IRA contribution, planners will want to assist them in developing a good cash-flow managment system.
Some individuals believe that an IRA account is not for them because the distributions are taxed as ordinary income when they retire. Certainly, that is one drawback of the program.
Yet, tax deferral and time value must be emphasized. The key is that clients pay less in taxes now, because the IRA lowers taxable income by the amount of the contribution. The money is also compounded much faster when it is not subject to current taxation. Finally, when the IRA funds are distributed, the taxes will be paid with depreciated dollars, because money is worth more today than it will be in the future.
The deferral and tax savings can be seen in the following illustration.

Without Deferral With Deferral
$1,500 per year $2,000 per year
9 percent 12 percent
20 years 20 years
$76,740 Total $144,105 Total
Assumptions:
Tax bracket: 25%.
Yearly contribution: $2,000. Interest/yield rate: 12%.

Without a qualified plan, the taxpayer earns $2,000, but pays $500 in taxes. Therefore, only $1,500 is saved and the interest is taxable. In a 25 percent tax bracket, the taxpayer can keep only 75 percent of the 12 percent interest, or 9 percent. Yield comparisons should be calculated at the same initial gross rate. The yield on the investments shown is the same whether an IRA is involved or not. For example, the same stock will not perform better or worse because it is in a retirement plan.

The total is significantly different under the qualified plan. However, some have argued that if the amount invested in an IRA is taken out in one payment, the total is less because the taxpayer has been thrown into a higher tax bracket. A more rational perspective would be to consider the amounts to be withdrawn over a number of years so the tax bracket would not increase significantly, if at all. The benefits would still be significantly greater with qualified plans.

The term “Social Security” is misleading, and even Congress has felt compelled to take steps to make the word “security” more concrete. Heated debate has surrounded the Social Security program, and questions concerning its solvency are likely to continue producing controversy. For those who will receive Social Security benefits in the near future, government tables list what the benefits will be. For those who are scheduled to retire over the next several decades, the computations will be, at best, guestimates.

One aspect that cannot be overlooked in discussing the problems besetting Social Security is the length of retirement. Life expectancy continues to increase. Government statistics show that the fastest-growing segment of the U. S. population, as a percentage, are those in their 80s. For those under age 60 in the year 2000, life expectancy will be over 100 years. Therefore, although no one knows their “expiration date,” most people can expect to spend a number of years in retirement.

Planning for this long span of time is a challenge for financial planners. It may also be a disheartening aspect of planning, because the increased life expectancy means that more current income is needed to fund future living expenses. For example, several years ago, the Social Security Administration indicated that retired workers received only an average of 13 checks before they died. As previously stated, this has changed. Now clients must be made aware that funding for longer life expectancies will require more of their money.

Most clients, assuming they are not the beneficiaries of a large endowment or trust fund, cannot rely on one source of income during retirement. For the majority, covering living expenses during retirement will require several sources of income, including retirement pensions, individual retirement accounts, Social Security, and investments. If clients are depending on Social Security to provide the lion’s share of retirement income in the future, they may be sadly disappointed. Those near retirement are relatively assured of a certain amount; this is not the case for those with many years to retirement.

Regardless of when a client will retire, the financial planner must assess projected Social Security benefits. First, it is important to look at the cost of contributing to the system. Amendments to the Social Security Act in 1983 were designed to correct projected future deficits by advancing increases in Social Security taxes and reducing or taxing some benefits. Social Security taxes cover Old-Age, Survivors, and Disability Insurance (OASDI) and hospitalization benefits.

The wage base has increased, and now for many individuals, Social Security taxes may be higher than their regular taxes. Clients must be prepared for this new, increased outflow. Therefore, any cash flow projections will have to take this factor into consideration.

Self-employed individuals are entitled to a credit against the self-employment tax of 2.3 percent in 1985, and a credit of 2 percent against the self-employment tax in 1986-89. Beginning in 1990, a new system for taxing the self-employed will eliminate some of the disparities between the self-employed and employees. It is noteworthy that the wage base for determining Social Security taxes must include deferred compensation contributions, such as 401(k) programs. It is especially apparent that the self-employed may well pay more in Social Security taxes than in income taxes.
The 1983 Social Security amendments made several other changes. Notable among these are:

• Automatic cost-of-living increases would be limited if fund balances fall below certain levels.

• Social Security recepients under the age of 70 who work are subject to a $1 reduction in benefits for every $2 of earnings when their earnings exceed a base amount. The base amount for 65 year olds was $6,960 in 1984 and will be adjusted under the terms of earlier legislation. Beginning in 1990, the $1 reduction will apply for every $3 of earnings over the base amount.

• More taxpayers will be subject to Social Security taxes, including such previously exempt groups as federal employees (hired on or after January 1, 1984) and employees of nonprofit organizations.

• The normal retirement age has been increased via phasedin extensions for workers who will reach age 65 after the year 2002. For those born after 1937, the age will gradually rise in two-month increments to a maximum age of 66 for those born between 1943 and 1954. The increase will continue to rise to age 67 for those born in 1960 and later.

One of the most controversial aspects of the Social Security amendment is the taxation of benefits. A maximum of 50 percent of Social Security benefits can be included as taxable income. Beginning in 1984, the taxable amount of Social Security benefits is the lesser of:

• One half of the Social Security benefits, or

• One half of the excess amount of the taxpayer’s modified adjusted gross income plus one half of Social Security benefits, minus the appropriate base exclusion.
Modified adjusted gross income is adjusted gross income plus any tax-exempt income, so that income from all sources, except Social Security, is included. The base amount is:

$32,000 for a married couple filing jointly.
$0 for a married couple filing separately who do not live apart for the entire year.
• $25,000 for all other taxpayers.

No one will debate that it is better to receive a tax-free than a taxable dollar. It is particularly apparent when employee benefits are analyzed. Some benefits are taxable, some are not. And whether these so-called “perks” are taxed is an important consideration in financial planning. The planner must also consider whether benefits match the client’s objectives and are cost effective. Employee benefits are not a panacea for all financial dilemmas. However, the appropriate selection of fringe benefits can go a long way in assisting clients to reach financial independence or to minimize a financial hardship, such as catastrophic medical bills.
Types of Benefits

First of all, benefits should not be duplicated. For example, if both spouses are covered under separate medical programs, what is the cost of each, if any? Whose coverage would protect dependents at least cost? The answer to these questions may allow one spouse to reallocate medical coverage funds to another benefit. Also important is which selected benefits are tax-free. Many times, employees would be “keeping more” if they sought tax-free fringe benefits rather than a taxable pay increase. As an example, employees in a 40 percent tax bracket keep only 60 percent of their increases in taxable income. Therefore, to pay for $1 of medical coverage, they would have to earn $1.67 before taxes. The following is a list of tax-favored employee fringe benefits deductible by the employer:

Death benefit

Corporations may pay up to $5,000 on the death of an employee. The money is tax-free to the beneficiaries or the estate of the employee.

Health coverage. Medical and dental plans which do not discriminate in favor of officers or the highly compensated are not taxable to employees under self-insured medical reimbursement plans. Furthermore, medical benefits provided by a licensed insurance company or health maintenance organization (HMO) under a group plan are exempt from the nondiscrimination requirements.

Disability insurance

Employer-paid disability income insurance is another tax-free fringe benefit. However these payments are not deductible by a sole proprietor or a partner in a partnership. It may be more beneficial for the client to select another benefit rather than disability insurance, because if he or she is disabled, disability benefits will be taxable.

Nevertheless, under IRC 105, disabled employees who retire prior to age 65 can exclude $100 per week up to $5,200 if their adjusted gross income (AGI) is $15,000 or less. The exclusion is reduced dollar for dollar by the amount AGI exceeds $15,000. Disability payments received from an employee-paid policy are completely tax-free.

Life insurance

The first $50,000 of life insurance is not taxable to the employee. All amounts in excess of $50,000 are taxable, based on the Uniform Premium table in the Internal Revenue Code. TEFRA now requires that these plans be nondiscriminatory. If a life insurance plan discriminates in favor of key employees or officers, then it is taxable to that group. In this case, it would be important to determine whether it would be less expensive for key employees to buy their own protection or be taxed on the company’s policy.

Child and dependent care

This can involve a companysponsored care program or cash payment. No more than 25 percent of the amounts paid or incurred by the employer may be for owners or shareholders who own 5 percent or more of the company. The plan must not be discriminatory.

Qualified group legal services plan. This fringe benefit was scheduled to expire December 31, 1985. Current law requiresthis benefit plan to be in writing and nondiscriminatory. For those plans which are nondiscriminatory, sole proprietors and partners may make deductible payments. Nonetheless, no more than 25 percent of the benefits may be provided for the owners or shareholders of the company, their spouses and children. Payments may be made only to insurance companies or organizations qualified to provide legal services.

Educational assistance programs

This type of program is also scheduled to expire on December 31, 1985. Up to that time, $5,000 in benefits may be provided tax-free. The plan must be in writing and not discriminate in favor of owners or shareholders. These benefits cannot cover tools, supplies, meals, lodging, or transportation.

Qualified transportation

Allowances for commuter transportation provided by employers is scheduled to terminate December 31, 1985. Such plans, which must be written and nondiscriminatory, do not pertain to sole proprietorships or partnerships. The qualified commuter vehicle must be used 80 percent for transporting employees between home and work.

“Cafeteria” plans

More companies are becoming aware that “one size” does not fit everyone. With this in mind, many companies allow employees to pick and choose among different types of fringe benefits-a so-called “cafeteria package.” Some benefits included in these plans have already been mentioned. The IRS has issued guidelines that must be followed for advantageous tax treatment of cafeteria plans under Code Section 125:

• Employees must elect the type and amount of benefit prior
to the beginning of the plan year.
• Elections may not be revoked or changed during the plan
year unless there is a change in family status, such as
birth, death, marrige, or divorce.
• At least one taxable and one nontaxable benefit must be
offered.
• Amounts designated for medical, legal, or dependent care that are not used during the plan year will be forfeited. The remaining sums cannot be rolled into a 401(k) plan or into a cash disbursement.
• Dependent care and legal services can only cover expenses for the current year.
Both Congress and the IRS are attempting to minimize some of the tax benefits of employee perquisites. Regardless of the employee benefits available, it is important to determine which benefits meet client objectives, and which benefits cause a gap needing to be filled by another method.

Since the beginning of union activity in the United States, wages have been a central issue in bargaining. Economic improvement has always been one of the most important union goals. Managements are also concerned with wage and benefit issues in bargaining because their ability to compete depends to some extent on their labor costs. Organizations producing equivalent output but with lower labor costs will have higher profits and be more able to operate during downturns.
Both labor and management are concerned about a variety of pay aspects. Each is concerned with the overall level of pay, but both are also concerned about how pay rates for different jobs in the organization and pay increases are determined and about what form of wages and benefits are paid to employees.

This examines the components of wage demands made by unions;

Specific aspects of wage and benefit issues from level, structure, form, and systems standpoints; the effects unions have on wage levels in both union and nonunion organizations; and the present level of inclusion of wage and benefit issues in labor agreements.

In studying this chapter, consider the following issues and questions:

1- What are the strongest current arguments unions and/or managements can raise in the proposal or defense of future or present wage and benefit levels?

2- What effect do wage and benefit levels have on the economic performance of the employer and on nonunion employment of the same or other employers?

3- How does the form of wage costs influence employer and employee outcomes?

4- How does the system for allocating salary increases differ in union and nonunion organizations?

5- How does the usual structuring of union wage and benefit demands alter the structure of wage differentials in an organization over time?

Fifteen years or so after the Federal Income Tax and the Federal Inheritance Tax came the Great Depression, and the extraordinary and totally unprecedented arts program of the New Deal, the first comprehensive federal arts program of the national government of the United States. The program was initially prompted by a 1933 letter from the painter George Biddle to his former roommate in prep school, the new President Franklin D. Roosevelt. Biddle’s letter specifically cited the Mexican mural movement and the important role the government of Mexico had played in supporting it. At their peak, between 1935 and 1938, the arts initiatives of the New Deal were the largest public arts program in the history of the world. More than 40,000 artists were directly employed by the government; there were commissions for murals in post offices and other public buildings; there was a Federal Theater Project and a Federal Writers Project; there were symphony orchestras; and much, much more.

These New Deal arts programs were also a radical departure from previous government relations with the arts. In a sense, they were the closest the United States has come to a socialist arts program. The major impetus for the programs was to provide employment for artists in the midst of the depression. The federal government hired artists directly. The government, through its Federal Theater Project, presented plays directly.

A few of the Federal Theater Project’s productions attacked the capitalist system; and some murals supported by the Federal Arts Project, including work by communist artists, aroused fierce public controversy. And the New Deal arts programs began to draw heavy political fire.

In 1938 there was a widely publicized investigation of some of the programs by the House Committee on Un-American Activities. That same year, the proposed Coffee-Pepper bill, which would have given some of the New Deal arts programs permanent status, failed to gain sufficient support in the House and the Senate.

In 1939 the New Deal arts programs were cut back sharply by the Congress. The nation began to prepare for the war against the Axis Powers that eventually came in December 1941, and by January 1943, the first federal arts program was dead.

From the time Karl Marx began to write about economics in 1843 until about 1858 (roughly a decade before Capital was published), he devoted a significant portion of his writing to a phenomenon he called alienation. Very little on the subject was published by him during his lifetime. Thus we do not know whether Marx really considered it important and would have included it in the portions of Capital published after his death, or whether he purposely did not publish it because he changed his mind and decided it was a false direction.

It was not until the middle of the twentieth century, when the Soviet Union began to publish some of Marx’s accumulated notes and manuscripts, that the materials on alienation became available to the public. But once the idea was made public, it attracted a great deal of attention among Marxist scholars, particularly among those who specialized in political science and sociology. And while the concept of alienation seems to hold less appeal for economists, it is useful for helping us reconstruct some of what Marx was after.

Actually, alienation seems to refer to at least two different concepts. The first, which has most intrigued noneconomists, describes the psychological state of workers in relation to the capitalist production process. According to Marx, capitalism, by replacing artisanship with mass-production techniques, by putting workers on assembly lines where their functions are reduced to repetitive detail rather than concern with the quality of the whole product, and by treating workers (or, rather, their labor power) as mere commodities that are bought and sold as part of the profitmaking process, causes workers to lose any sense of satisfaction from their labor and any means for identifying with their output. In short, modern workers are alienated from the production process in ways that the medieval artisans were not.

What… constitutes the alienation of labour? First… that in his work… he does not… feel content but unhappy, does not develop freely his physical and mental energy but mortifies his body and ruins his mind…. Lastly, the external [alien] character of labour for the worker appears in the fact that it is not his own, but someone else’s… that in it he belongs, not to himself, but to another.”

The second concept of alienation, which has more relevance to our present discussion, describes the connection between the accumulation process and the produced means of production that are made available to the economy. According to Marx, such items as plant and equipment are as much the product of labor as are any other commodities. However, in industrial economies, the worker’s job depends on the availability of factories and machinery. Thus, after she has labored to make these particular products and product management, the worker must confront them again, this time as domineering, alien objects that hold the power to determine whether she will remain employed. The very items that the worker has made with her own hands become the means by which capitalists can control her.

Aside from the domination to which the worker is subjected by the alienated products of her own making, this form of alienation is significant because it has an inherent tendency to escalate. Accumulation, by its very nature, builds up the economy’s stock of productive equipment. As this happens, workers become increasingly dependent on more and more equipment in order to remain employed. And as time passes, their dependence on the alienated products of their labor continues to grow proportionally with the economy.

In the early stages of capitalism, workers could easily find employment on their own in industries that utilized relatively few machines. But as capitalism matures, workers more and more are forced into automated factories with all the frustration and alienation that attends such work places. Here we have the seeds of the class antagonism that Marx predicted would contribute to the demise of capitalism. In other words, here we have a law of motion of capitalism.

If this interpretation of alienation is valid (and it is not entirely clear from Marx’s unfinished writing on the subject), it is a problem that lies at the heart of the dynamics of capitalism as Marx saw them. The very mechanism that produces surplus value and capital accumulation must aggravate alienation, and through it, we are told, capitalism does indeed sow the seeds of its own destruction.

Thus, Marx felt that a revolution spurred by worker alienation might be one way that capitalism would die. Another would be through a spasmodic business cycle.