A New Plan to Shore Up Social Security: Employer Compensation Tax

The ECT would apply to all compensation costs, "including all wages below and above the current tax cap, employer-sponsored insurance premiums, health savings account contributions, employer retirement contributions, stock options, worker compensation premiums, transportation benefits, and other fringe benefits," the Committee explained.

The ECT would be imposed on each employer’s total compensation costs rather than each worker’s pay, according to the group.

"Employers would continue to withhold the worker side of the payroll tax based on an individual’s wages, and these wages would continue to be used for benefit calculations."

The Social Security retirement and Medicare Hospital Insurance trust funds "are approaching insolvency, with both trust funds expected to be depleted in just seven years," the committee said. "Without action, retirees face an automatic 24% benefit cut in 2032, while Medicare hospital payments would be cut by 12%."

Unintended Consequences

Dan Adcock, director of government relations and policy for the National Committee to Preserve Social Security and Medicare, noted his group's continued emphasis on revenue.

“We have been saying for years that the fairest solution for Social Security’s looming financial shortfall is to bring more revenue into the system, instead of cutting benefits," Adcock said. The ECT "is an interesting idea that requires further study. It definitely would bring more revenue into Social Security by having employers contribute more."

Nancy Altman, president of Social Security Works, said that while the group is "always pleased to see proposals that bring more money into Social Security and Medicare, instead of cutting benefits," the ECT "plan is misguided and indeed a bit incoherent."

Said Altman: "Since some fringe benefits are already subject to FICA contributions, will this be double taxation? Moreover, because fringe benefits are voluntary, the CRFB proposal is likely to have unintended, unanticipated consequences."

One potential concern, according to Adcock, "is that taxing employer-sponsored benefits could negatively impact rank-and-file employees, if, for instance, it discouraged employers from offering those benefits (e.g., employer-provided health insurance)."

Added Altman: "Rather than imposing large additional costs on small businesses and reducing the compensation of low- and middle-income workers, Congress should require millionaires and billionaires to pay their fair share into the system."

'Step in the Right Direction'

Adcock maintained that the ECT "is a far superior idea to raising the retirement age, means testing benefits or privatizing Social Security. On face value, at least, the ECT seems like a step in the right direction.”

The committee explained in its paper that Karen E. Smith at the Urban Institute modeled the ECT proposal using the Dynamic Simulation Income model. Under that analysis, replacing the employer payroll tax with an ECT would:

• Raise $2.5 trillion over a decade and 0.7% of GDP over 75 years.
• Close two-thirds of Social Security’s shortfall and half of Medicare’s gap.
• Alternatively, close one-third of Social Security’s shortfall, one-eighth of Medicare’s shortfall and fund a 1 percentage point cut in payroll taxes — improving solvency while reducing taxes for the bottom 60% of workers.
• Extend Social Security solvency by two decades to 2055 and modestly extend Medicare solvency — with further extension if combined with other reforms.
• Increase progressivity, generating revenue mainly from the highest earners.
• Support stronger economic growth than alternative revenue options.
• Improve horizontal equity, efficiency and simplicity; slow health care cost growth; and avoid viability and revenue stability concerns of alternatives.