Social Security costs may eventually exceed its revenue base and then Social Security will need to rely on its trust funds to keep up with scheduled benefits for a period of time, until those trust funds run out of money.
Social Security is mainly funded through a dedicated payroll tax created by the Federal Insurance Contributions Act. Employers and employees each pay 6.2 percent of wages, with a cap on the amount of wages subject to the tax.
Payroll taxes provide 91 percent of the revenue received each year by Social Security, with 4 percent coming from federal income taxes paid on benefits and 5 percent from interest earned on trust fund assets.
The latest Social Security Trustees report has the Old-Age and Survivors Insurance (OASI) Trust Fund running out in 2033. At that point, the trustees think only 77 percent of benefits will be payable. The combined OASI and Disability Insurance (DI) Trust Fund, are expected to run out of money by 2034. At that point, 81 percent of benefits will be payable.
The OASI Trust Fund pays retirement and survivors benefits. The DI Trust Fund pays disability benefits. The trust funds can only be used to pay benefits, as well as administrative costs related to Social Security. Special Treasury bonds are used as investment vehicles for any funds not immediately needed.
Most would agree that the Social Security Trust Funds need to have greater cash inflow to avoid cutting future benefits. Different options to supplement the payroll tax have been discussed for years.
The following links are provided to give an overview of strategies and tactics that may be employed.
- Bankrate has an online article briefly outlining 5 potential ways to keep Social Security from going broke.
- AARP offers How To Save Social Security — Pay More Taxes? Cut Benefits?
- The Government Accountability Office has There Are Options for Reforming Social Security, But Action is Needed Now.
A new study from Boston College’s Center for Retirement Research provides insight into an approach to also expand the payroll tax base. Employer-sponsored health insurance (ESI) is being examined as a new way to save Social Security.
Taxing ESI would be among the options mentioned by Bankrate, AARP, and the Government Accountability Office to rescue Social Security by increasing the amount of payroll tax revenues that the program currently collects through a new resource available to the program by using revenues from outside of Social Security’s existing revenue sources.
The study, How Much Could Taxing Health Benefits Help Social Security? explores how taxing employer paid health benefits could prop up Social Security by increasing the available revenue for future benefits. Taxing ESI could result in future payroll taxes being increased by about $400 a year and reduce Social Security’s shortfall by about 25 percent.
What about ESI plans such as the FEHB Federal Employee Health Benefit (FEHB) plans which continue to be provided upon after working years?
Taxing ESI is a stealthy way to increase the current taxable wage base of $176,100 used for 2025. Taxing ESI can be viewed as a regressive approach as it would impose no additional taxes toward earners above the wage cap. Adding ESI benefits to the payroll tax base would require lower-paid earners to contribute more while collecting no additional revenue from the highest earners.
FEHB premiums vary by plan, but generally you pay about 30% and your agency pays about 70 percent. You will pay the same percentage of the premium during retirement with the Office of Personnel Management then replacing the role of your agency.
The possible issue of ESI plans that offset the premiums of health plans for annuitants is not addressed in the study.
