Taxing health care benefits could reduce the Social Security gap by 25%

A new report suggests that counting the value of employer-sponsored health insurance (ESI) toward taxable wages could generate about $400 more in annual payroll taxes per worker, shrinking Social Security’s long-term funding gap by roughly 25% in 75 years.  

The report published Tuesday by the Center for Retirement Research at Boston College concludes that the option is regressive since it would collect no additional taxes from earners above the wage cap, but it could be part of a larger Social Security reform package. 

The idea comes as Social Security faces a widening shortfall. Since 2021, benefits have exceeded revenues. In 2026, the cost-of-living adjustment is set to rise by 2.7%. 

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. 

The analysis excludes self-employed workers, understating the potential revenue impact of expanding the contribution base.

“Clearly these policy options would affect lower earners and higher earners very differently,” the report states. “Raising the taxable maximum would require highly paid earners to pay slightly higher taxes. 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.”