By 1994, it had risen to 8.6 percent, the result of numerous increases in Social Security tax rates and the taxable wage base. The percentage of compensation going to fringe benefits has risen even more. In 1974, fringe benefits accounted for 6.3 percent of employee compensation. By 1994, they had risen to 9.5 percent of compensation. In short, workers have chosen to take more of their compensation in the form of benefits, and their choice is not surprising.
Benefits are tax free, whereas wages are taxable.
That workers will substitute tax-free benefits for taxable wages when tax rates rise is a phenomenon well documented in the economic literature. Responding to Higher Tax Rates. The steepest rise in benefits came during the 1970s, when inflation was pushing workers into higher and higher tax brackets. In the early 1980s, after the Reagan administration got inflation under control, indexed tax brackets to inflation and cut tax rates, workers shifted out of benefits and took more of their income in the form of wages. Since 1990, tax rates have been rising again, as the result of the Bush and Clinton tax increases.