How Will Employer Health Insurance Affect Wages and Social Security Finances?

The rising cost of employer contributions to employee-sponsored health insurance (ESHI) can slow wage growth and erode the Social Security wage base.  Both these effects were evident in the decades before 2005, as ESHI increased as a share of compensation.  Fortunately, the ratio of ESHI contributions to compensation plateaued after 2005, stabilizing wages and halting the erosion of the share of labor compensation subject to Social Security’s taxable base.  The question is whether the stabilization of employer contributions as a share of compensation is temporary or permanent.  The analysis used the Medical Expenditure Panel Survey (MEPS) to determine why ESHI contributions rose as a share of compensation prior to 2005 and why this ratio stabilized in recent years.  These findings, combined with some speculation about the impact of the Affordable Care Act (ACA) and the COVID pandemic, are used to project the ratio of ESHI to compensation over the next decade.

The paper found that:

• The growth in National Health Expenditures (NHE) as a percentage of GDP was the major driver of the ESHI-to-compensation ratio both before and after 2005.
• After 2005, however, this impact was largely offset by the decline in ESHI participation among lower earners and the decline in demand for family plans. 
• Looking forward, CMS projects that NHE as a share of GDP will grow faster than in the previous decade, leading to a significant increase in ESHI as a share of compensation.  
• But, if ESHI participation and demand for family plans decline as they have in recent years, these two factors should offset the growth in healthcare expenditures.

The policy implications of the findings are:

• The potential increase in ESHI as a percentage of compensation would slow wage growth and erode Social Security finances.
• A key question is whether the decline in participation among low earners and the demand for family plans will continue.       
• The findings offer one more reason to get the growth in healthcare expenditures under control.