Adding Employer Contributions to Health Insurance to Social Security’s Earnings and Tax Base
The exclusion of employer-sponsored health (ESI) benefits from taxable income reduces income and payroll tax receipts, but also reduces Old Age, Survivors, and Disability Insurance (OASDI) benefits by excluding a substantial share of compensation from the OASDI earnings base. This study uses the Urban Institute’s DYNASIM model to estimate the effects of including an additional year of ESI premiums in taxable earnings on the level and distribution by age and income group of income tax burdens, payroll tax burdens and OASDI benefits. We find that the increased present value of OASDI benefits from including ESI benefits in the wage base in 2014 offsets about 22 percent of increased income and payroll taxes, 57 percent of increased payroll taxes, and 73 percent of increased OASDI taxes. The overall distribution of taxes and benefits by income group follows the same pattern, with both taxes and benefits increasing as a share of income between the bottom and middle quintiles and then declining as a share of income for higher income taxpayers. But households in the bottom income quintile receive a net benefit from including ESI in the tax base because their increase in OASDI benefits exceeds their increase in income and payroll taxes. Over a lifetime perspective, all earnings groups experience net tax increases, but middle income groups experience the largest net tax increase as a share of lifetime earnings. Higher benefits offset a larger share of tax increases for lower than for higher earnings groups.