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Key Takeaways
- A new report out of the Center for Retirement Research at Boston College suggests that taxing employer-sponsored health benefits could provide a boost to the Social Security program.
- Most of the program’s revenue currently comes from the payroll tax, which is levied on income up to $176,100. Benefits aren’t included in this tax base.
- The report suggests that adding employer-sponsored health insurance to the program’s base could boost revenue for the program by $70 billion.
The Social Security program is projected to run out of funding by 2034, and there’s a lot of debate as to what to do about it. Most experts agree Congress should find a way to boost the program’s revenue, as opposed to cutting benefits.
One idea: Tax employer-sponsored health benefits.
Right now, most of the program’s revenue comes from the payroll tax, which is levied on income up to $176,100 as of 2025. Any annual earnings above that are exempt from Social Security taxes.
The value of most benefits, such as health insurance, a retirement plan, or disability coverage, is generally not subject to federal income taxes and is excluded from the payroll tax base.
A new report from the Center for Retirement Research at Boston College suggested that adding employer-sponsored health insurance (ESI) to the program’s contribution base would impact Social Security’s revenue and overall health.
What The Numbers Tell Us
There’s no question that it would help.
The authors looked at 2021 tax data—the most recent available. Adding ESI benefits to the Social Security taxable wage base would have raised the average tax by $420 per year (about 7%), boosting Social Security revenue by $70 billion, they found.
A flaw with this provision, though, is that adding ESI to the payroll tax base would increase tax burdens on workers who earn less than $176,100.
What Are Some Other Ideas on How To Fund Social Security?
If Congress doesn’t act to make changes to Social Security, the trust fund covering the funding gap is estimated to run out by 2034. Without intervention, recipients will only receive 81% of their expected benefits at that time.
Taxing employer-sponsored health benefits is just one option. Experts say there are multiple ways to bridge the funding gap. Here are some of the most prominent suggestions:
- Raise the Earning Cap– The earnings cap, or the wage base, is the maximum amount of an individual’s earnings subject to the Social Security tax each year.
- Increase Payroll Taxes- Some experts believe a gradual increase of 1% (from 6.2% to 7.2%) could help balance the funds.
- Implement a System That Automatically Adjusts– Congress could create a mechanism so that the program automatically adjusts revenues or benefits when a shortfall emerges.
- Create Additional Funding Sources– Two senators have suggested creating an additional fund that would be invested in stocks, bonds, and other investments, and generate a higher rate of return than the current trust funds.
Richard Johnson, senior fellow at the Urban Institute and co-author of the brief, said that to protect low-income workers, Congress could restrict the tax on health benefits to workers with annual earnings above a certain threshold, much like the current earnings cap.
The report also compared the impacts of this change to what strictly raising the earnings cap could do for Social Security.
Many beneficiaries, economists, and policy experts believe expanding the earnings cap to reflect the rise in high-wage earners is a simple solution to improve the health of the Social Security program. The CRR report compared the impact of adding ESI to the tax base with eliminating the earnings cap altogether.
Eliminating the earnings cap instead of adding ESI to the tax base would increase the average annual 2021 Social Security contributions by $1,330, or 22.5%. This would have had three times the impact on the program that adding ESI to the tax base would, boosting Social Security by approximately $220 billion, according to Johnson.
Earnings For Some Workers Are Shrinking
However, Johnson notes, “Raising the payroll tax cap makes sense, but that won’t be enough.”
That’s because earnings have grown much faster for high-wage workers than low-wage workers. As a result, the share of total earnings subject to the payroll tax has shrunk. In 2023, it was 83%, versus 89% in 1985.
He said the best solution to ensure the health of the program will require a “multi-pronged approach.” Coupling a raise in the payroll tax cap with another source of revenue, such as the ESI approach, is the best bet to ensure the program’s longevity
Social Security’s spending has exceeded its revenue since 2021, because the number of beneficiaries is growing faster than the pool of younger workers who pay into the program. If Congress doesn’t intervene within the decade, beneficiaries will only receive 81% of their expected benefits.
