Effects of Employer Health Costs on the Trend and Distribution of Social Security-Taxable Wages
The increasing cost of employer contributions for employee health insurance reduces the percentage of labor compensation that is subject to the Social Security payroll tax. Rising health insurance contributions also have a more subtle effect on the Social Security tax base because they influence the distribution of money wages and the percentage of wages below the taxable cap. Workers bear most of the burden of employer health contributions through lower money wages. Any change in the average cost and distribution of costs of employer health plans can have an effect on the distribution of wages and the percentage of wages subject to the payroll tax. This paper uses the Medical Expenditure Panel Survey (MEPS) to analyze trends in the cost of employer health contributions and the cross-worker distribution of health contributions. Our analysis shows that the 1996-2008 increase in employer health premiums was faster than overall compensation increases but only slightly faster among workers below the taxable maximum compared with those above the maximum. However, because employer health insurance premiums represent a much higher percentage of compensation below the maximum taxed earnings amount, the effect of health cost trends exerted a disproportionate downward pressure on money wages below the taxable maximum, reducing the percentage of compensation subject to the payroll tax. An exception to this pattern is the trend in employer health costs for workers in the bottom one-tenth of the wage distribution. Between 1996 and 2008, workers with very low wages were less likely to participate in employer health plans and more likely to enroll in less expensive plans, thus slightly reducing employer costs of providing them with insurance. Based on our findings we simulated the implications of the health reform law on the trend in employer health costs around 2016, when the Affordable Care Act is expected to be fully implemented. We find only slight effects on the fraction of worker compensation that will be subject to Social Security taxes. The higher insurance costs faced by employers who will be required or induced to offer health plans will be approximately offset by lower health costs on the part of employers who will see some formerly insured employees accept subsidized health insurance outside of an employer plan. The main long-term impact of reform on the taxable wage base is likely to be through its effect on the trend in underlying health care costs.