Workers Drop Health Insurance, Stabilizing Employer Costs

The cost to employers of providing their workers with health insurance has remained fairly stable for years.

At first blush, this seems like good news for workers. When benefit costs rise, employers tend to take it out of their employees’ wages. But as costs stabilized, health insurance no longer exerted the downward pressure on paychecks that it did back in the 1990s. This had the added advantage of halting the erosion of wages on which Social Security levies its payroll tax.

But to fully understand what all of this meant for workers requires digging into why employers’ insurance costs, measured as a percentage of workers’ total compensation, stabilized. A recent study delved into this question by examining the period 1996 through 2019. The researchers stopped the analysis before COVID to avoid measuring the unusual effects of the pandemic.

One major force that offsets rising U.S. healthcare spending, starting in 2005, was that lower-income workers, who are least able to afford health insurance in the first place, were opting out of employer coverage, according to the Center for Retirement Research at Boston College.

When they drop their policies, employers’ costs decline disproportionately because insurance is such a large share of a low-income worker’s total compensation – as much as half, compared with single-digit percentages for the highest-earners.

Lower-income workers were dropping the coverage for two reasons. First, they struggled to pay the premium increases. Employers were also paying a smaller share of the premiums at the same time workers increasingly were shouldering policies with high deductibles. Rising insurance costs affect everyone, but lower-income workers feel it more.

The Affordable Care Act (ACA), which passed in 2010, probably also played a role. The private policies individuals can now purchase on the state insurance exchanges provide another, often more affordable option. The less workers earn, the larger the premium subsidy they qualify for. Millions of workers have also been added to Medicaid’s rolls under the ACA, which raised the income cap for eligibility for the low-cost coverage.

Employers’ insurance costs also declined because fewer workers, and lower-paid workers in particular, were enrolling in expensive family plans. Average premiums on these plans have quadrupled since the mid-1990s, hitting $20,500 in 2019, compared with about $7,000 for individual policies. Family plans are not an option under the ACA.

This brings us back to what these trends mean for workers’ wages – and, by extension, Social Security’s finances. One of two scenarios could play out by 2031.

If workers continue to opt out of employer health coverage, as they have been doing, this would offset the anticipated increases in future health spending and keep the pressure off wages. Under this scenario, the researchers estimate that employer costs as a percentage of workers’ total compensation would stay at the current level – less than 8 percent.

But if plan participation stabilizes, employer costs could rise to almost 9 percent of compensation by 2031. “Going forward, rising health costs could again push up” employers’ costs – and suppress wages – “unless the factors that have been offsetting this growth continue,” the researchers concluded.

To read this brief by Anqi Chen, Alicia Munnell, and Diana Horvath, see “How Will Employer Health Insurance Affect Wages and Social Security?”

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA or any agency of the Federal Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.