Social Security is projected to become insolvent in six years. These are some of the creative solutions that are on the table, beyond raising payroll taxes.
As policymakers scramble for solutions to shore up Social Security’s finances, some are looking to the tax system to find new sources of revenue for the program.
The proposals from lawmakers come as Social Security is hurtling toward a crisis. The program could become insolvent in as few as six years, which would mean benefit cuts of at least 20% for current and future beneficiaries. Congress has not yet seriously deliberated about what reform measures it could use to help the beleaguered program, but as Social Security gets closer to running out of money, legislators may soon be forced to come up with a solution.
Lawmakers and experts have explored the potential effects that certain provisions — such as eliminating the income cap on Social Security taxes or raising the full retirement age — would have on the program and its beneficiaries. Another option could be to levy taxes on employer benefits and estates and direct those funds to the program.
Right now, the program is funded primarily through payroll taxes. Other income sources include taxation of Social Security benefits and interest earnings.
As they think about ways to increase the program’s revenue, legislators “can be very creative,” said Nancy Altman, president of the advocacy group Social Security Works. “There are probably an infinite number of ways. I think the right question is: What is the right and fairest way to share the cost without unduly burdening anyone?”
But using different forms of taxation to pay for the program could risk undermining Social Security’s status as an earned but universal public benefit, experts say.
There is a currently correlation between the amount workers pay into the system and the benefits they ultimately receive. Some proposed reform measures — such as having higher earners pay more without receiving a higher benefit, or taxing all workers’ nonwage benefits — risk breaking that connection and thus undermining the philosophical underpinnings of the program.
“The big question about nonpayroll forms of taxation is whether that changes the philosophy or structure of Social Security,” said Jonathan Schwabish, a senior fellow focusing on taxation at the Urban Institute, a think tank focused on economic and social policy.
But the workforce today looks different than it did when Social Security was created, Schwabish noted. “The nature of compensation has changed in the last 90 years,” he said. “The economy has changed, too.”
The status quo
One tax change that isn’t being seriously considered by policymakers is to increase the percentage of the payroll tax that provides most of the revenue for the program. Currently, workers and employers each contribute 6.2%, while self-employed workers pay the entire 12.4%. The payroll-tax rate has been increased before: When the first payroll taxes were collected for Social Security in 1937, the rate was 2%, evenly split between employee and employer.
Hiking that tax rate is not a popular proposal now, especially with people already worried about the cost of living, experts say.
But Social Security needs more money coming in. The U.S. population is aging rapidly, and there aren’t enough younger workers paying into the system to support the program over the long term.
There are really only two ways to resolve this issue: cutting benefits or increasing taxes, and neither is popular. But even though Social Security is often referred to as the “third rail of politics” — touching it can be dangerous, at least to a politician’s career — most everyone agrees that something must be done to prevent beneficiaries from losing a portion of their retirement income.
Because of changes in the economy and in how workers earn money, there is an argument for finding other ways to tax individuals in order to fund the program, some experts say. Even as wealth inequality has become more stark, workers pay Social Security taxes only on income up to $184,500. About 6% of covered workers earn more than that every year, according to the Social Security Administration.
That means only about 83% of all earnings covered by the program are subject to the payroll tax, compared with 90% in 1983, when the last major reforms to Social Security were passed. And although only 6% of covered workers have earnings that exceed that cap, wages are growing faster for these higher-income individuals.
Generating more tax revenue doesn’t necessarily mean everyone will pay more in taxes, Schwabish noted. For example, if the government decided to impose a tax on stock sales and dedicate a portion of estate-tax revenues toward Social Security, a given person might not be affected by both those measures.
“If you are not invested in the stock market, the transaction tax won’t affect you. If you not are bequesting money to family, that taxation may not affect you,” Schwabish said. “Not all taxes are equal.”
Taxing fringe benefits
There are also ways to increase tax revenue for Social Security outside the scope of salaries.
Right now, the payroll tax is only applied to traditional wages. Any additional benefits, such as health insurance, life insurance or contributions to retirement plans, are not taxed for Social Security.
Taxing such benefits could generate a significant amount of money for the program. Applying the payroll tax to employer-sponsored health insurance could bring in about $2.4 trillion over 10 years, according to estimates from the Tax Foundation, while taxing other types of benefits, such as life insurance or commuter benefits, could generate another $235.3 billion.
“While uncapping the payroll tax and raising individual income-tax rates are often the go-to reform options for policymakers, base broadeners like [employer-sponsored health insurance] and other fringe benefits are much better alternatives,” the Tax Foundation said in its report.
A proposal to replace the employer side of the payroll tax with a “flat employer compensation tax,” for example, would apply to all compensation options — including all wages, employer-sponsored health-insurance premiums, employer contributions to health savings accounts and retirement accounts, stock options and transportation benefits, according to the Committee for a Responsible Federal Budget, a bipartisan think tank focused on public policy. While it would make taxation simpler, the CRFB argued, it could also indirectly raise costs for workers as employers pass along their own costs. Mostly, the highest earners would be affected.
Economists often make the case that levying more taxes on an employer will eventually trickle down to the employee, said Rich Johnson, vice president of financial security at the AARP Public Policy Institute. “The idea is that employers care about the total cost of employing someone,” he said, although he added that there was not enough empirical evidence to support that conclusion.
Such a flat employer compensation tax, or ECT, could delay Social Security’s insolvency by 20 years, or by even longer if it was part of a package of provisions to fund the program. It could also create a “more stable revenue source,” the CRFB said, because “rising healthcare costs and wage inequality” slow the growth in income from the payroll tax.
Investment income tax
Two ideas floating around Congress would tax investments in order to fund Social Security. One is called a financial-transaction tax, and the Congressional Budget Office predicts it could amount to 0.1% on the sale and purchase of certain investment products. That $1 for every $1,000 traded could bring in $777 billion in revenue over 10 years, according to the Brookings Institution.
The other idea is to target all investment income for certain high earners. Sens. Elizabeth Warren, a Massachusetts Democrat, and Bernie Sanders, a Vermont independent, have proposed a bill to shore up Social Security’s finances and expand benefits. Under the Social Security Expansion Act, which was introduced to Congress last year, high-income individuals and couples would face a steeper tax on net investment income such as dividends, capital gains, rental income and interest. Some businesses would also be affected.
High earners are already subject to a net investment income tax. Single filers with a modified adjusted gross income of more than $200,000, and those who are married filing jointly with a modified adjusted gross income over $250,000, are subject to a 3.8% tax that applies to their net investment income or the amount that exceeds the threshold, whichever is lower. The revenue from this current tax, however, goes toward the government’s general fund and not toward Social Security.
A combination of eliminating the income-tax cap, a new 12.4% tax on net investment income and a new net investment income tax on certain businesses would generate $33.8 trillion in revenue (although the bill also proposed expanding Social Security benefits and thus the program’s expenses), according to a letter that Stephen Goss, then the chief actuary of Social Security, wrote to Sanders in response.
But the consequences of a larger net investment income tax could have repercussions for workers’ overall retirement savings as well as the economy, said Rachel Greszler, a senior research fellow at the Plymouth Institute for Free Enterprise, part of the conservative policy advocacy group Advancing American Freedom. “It’s not just millionaires and billionaires,” she said.
Social Security was meant to be a fully funded program that bulked up its reserves over time, Greszler noted. Instead, the program’s income is immediately sent out to pay current benefits.
Increasing taxes like this means people have less money in their paychecks to put toward saving and investing on their own, she said.
“This is the tragedy of what Social Security has become,” Greszler said. “The founders did not intend for it to crowd out savings and investing.”
Estate taxes
Another option is to take a portion of the federal government’s existing estate tax, which is levied on a person’s estate after their death, and put that money toward Social Security. The estate-tax exemption is currently $15 million for individuals and $30 million for married couples. A person can leave an unlimited amount to their spouse after their death.
Estate-tax exemptions were not always this high, noted Altman at Social Security Works. In 1996, for example, the exemption was $600,000, and it only reached $1 million in 2002, according to the Tax Foundation.
The maximum federal estate-tax rate is 40% in 2026. If the government were to decide to use estate-tax revenue for Social Security, it could put a portion of the tax revenue toward the program, with the rest going elsewhere. Years before he died in 2008, Robert M. Ball, who served as Social Security commissioner from 1962 to 1973, proposed keeping the estate-tax exemption at $3.5 million with a 45% tax rate, and sending all the revenue it generates to Social Security’s trust funds.
“It reinforces the idea that we are a meritocracy,” Altman said. “Inherited wealth is fine, but level the playing field.”
