Leveraging Tax Data to Measure the Potential Impact of Broadening Social Security’s Revenue Base

This paper measures the prevalence, value, and distribution of certain fringe benefits that are currently excluded from Social Security’s Old Age, Survivors, and Disability Insurance (OASDI) contribution base, including employer-sponsored health insurance (ESI) and employer contributions to health savings accounts, medical savings accounts, and dependent care benefits.  We then simulate the potential impact of broadening the contribution base to include the value of those benefits, showing the effects on program revenue and the size and distribution of OASDI contributions.  Our data come from federal income tax records from the Internal Revenue Service, which links individual tax returns, business returns, and information returns, including Form W-2s.

The paper found that:

• In 2021, 40 percent of wage and salary workers received ESI benefits, with an average annual value of $10,710, equal to 12 percent of annual cash wages.  The prevalence and value of ESI benefits increased with earnings, but ESI benefits equaled a larger share of cash wages for low-wage earners than for higher-wage earners.
• Broadening the OASDI contribution base to include ESI benefits for wage and salary workers would have raised average annual 2021 OASDI contributions by $420, a 7 percent increase.  Among wage and salary workers with ESI, average annual 2021 contributions would have increased 12 percent overall and 22 percent for those with annual earnings between $25,000 and $49,999.
• Adding employer contributions to health savings accounts, medical savings accounts, and dependent care benefits to the contribution base would have negligible effects because relatively few workers receive those benefits.

The policy implications of the finding are:

• Broadening the OASDI contribution base to include the value of ESI benefits could improve program finances by generating additional revenue.
• However, adding ESI benefits to the contribution base would raise payroll tax burdens for many low-wage workers, while collecting no additional revenue from workers with earnings above the program’s taxable maximum.