Taxing health care benefits could cut Social Security gap by 25%

"In 2023, the program collected $1.351 trillion but paid out $1.392 trillion, leaving a $41 billion deficit. The trust fund has covered the gap so far, but it is projected to run out by 2035. At that point, Social Security could pay only 83% of promised benefits, with the figure falling to 73% by 2098. In 2025, payroll taxes apply only to wages and salaries up to $176,100."

"That cap rises each year, but incomes for high earners are growing faster, eroding the taxable share of earnings from 89% in 1985 to 83% in 2023. Meanwhile, employers' contributions to fund benefits like health insurance, retirement plans and disability coverage are usually not included as compensation under the federal income tax or the payroll tax. The report shows that about 40% of workers received ESI in 2021, averaging $10,710 in annual contributions and equal to 11.8% of total wages."

"Including ESI in the payroll tax base would have raised the average annual Social Security contribution from $5,920 to $6,340 in 2021, adding about $70 billion in revenue that year. (The estimated impact would be larger if considering only those with ESI.) Still, the measure would raise less than other options. Eliminating the cap would raise the average annual contribution by $1,330, while eliminating the cap but adding ESI would raise it by $1,869."

Social Security faces a widening shortfall as benefits have exceeded revenues since 2021. In 2023, the program collected $1.351 trillion and paid out $1.392 trillion, leaving a $41 billion deficit. The trust fund is projected to run out by 2035, after which benefits could be paid at 83%, falling to 73% by 2098. Payroll taxes in 2025 apply only to wages up to $176,100, and the taxable share of earnings declined from 89% in 1985 to 83% in 2023. Employer-sponsored insurance contributions are typically excluded from the payroll tax base. Including ESI would raise revenue, with alternative measures yielding larger increases and uneven impacts across earners.

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