FICA for all: Securing the Social Safety Net Through Tax Base Expansion

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Social assistance programs have a long history in the United States. The Social Security Act introduced one of the first federal programs to provide direct assistance for citizens in need. It was a critical step in pulling the United States out of the Great Depression and preventing future generations from experiencing the same abject poverty. Social Security acts as a government insurance plan that citizens pay into to support those in need, with the promise of receiving these same benefits when they grow older. However, Social Security Old Age and Survivors benefits (OASI) and Health Insurance (HI), commonly referred to as “Medicare Part A”, are currently funded through a tax structure that is inherently regressive and unsustainable, leading to long-term solvency issues that threaten their existence. The time has come to expand the tax base and ensure these programs remain an essential part of the social safety net.

While OASI and Medicare programs have remained widely popular with both politicians and the public, there is a growing consensus that Social Security will not be able to provide full benefits to future retirees. Current Social Security Trust Fund assets are enough to pay for current program liabilities, but both programs are at risk of becoming insolvent. In its latest report to Congress, the Social Security Board of Trustees acknowledged the slow-moving crisis, stating that “Asset reserves are projected to become depleted in 2033 for OASI…and 2031 for HI.”

Figure 1: Data from 2023 Social Security Administration report and summary (letter to Congress)

Figure 2: Data from 2023 Social Security Administration report and summary 

Based on the current estimates of beneficiaries and benefits, both OASI and Medicare face an existential crisis. While reducing benefits and eligibility could stem the coming tide, most Americans (and consequently, most elected officials) do not want to reduce benefits to combat this threat. If the status quo remains, policymakers will be left with minimal options as benefits paid continue to exceed revenues and the trust fund depletes.

To make Social Security and Medicare solvent, lawmakers must either increase revenues or cut benefits. Even the suggestion of cutting benefits is both politically and socially unpopular. To avoid this and maintain their status as elected officials, politicians can either increase the rate applied to the current tax base or increase the tax base itself. Increasing the tax rate would only put added pressure on those currently bearing the burden, making the tax more regressive. Expanding the tax base, however, applies existing Federal Insurance Contributions Act (FICA) and Self-Employed Contributions Act (SECA) taxes to the forms of income earned by wealthier Americans. To shore up benefits and create a more progressive tax system, the answer is clear— expand the tax base. There are three changes to the current FICA and SECA tax regimes that expand the amount and the types of income subject to these taxes: tax employer fringe benefits, expand the types of income subject top FICA, and remove the income caps on FICA and SECA.

Taxing Employer Fringe Benefits

Employers increasingly offer fringe benefits in lieu of monetary wages. One of the primary fringe benefits today is employer-sponsored health insurance premiums (ESHI) in which employers can claim tax exemptions by contributing to employee health plans. These exemptions represent one of the largest federal government tax expenditures with projections estimating the total to reach roughly $641 billion by 2032.iv Collecting even a fraction of this lost revenue could both decrease deficits and pay for nearly all future Social Security and Medicare obligations.

In addition to ESHI fringe benefits, this solution would also tax employee stock options. These stock options have been increasingly more attractive to and used by wealthy individuals who take advantage of capital gains to acquire additional income and wealth. Currently, stock option taxes are only realized when the employee exercises the option or realizes the gains on the stock. Under a new plan, FICA taxes would be applied when the offer is given and accepted. The rate would be applied as it is for labor income (7.65% for employee and employer) and would be calculated based on the stock’s fair market value at the time of offering and acceptance.

Expanding FICA/SECA: The “National Income Tax”

The second change to current FICA and SECA taxes involves subjecting all forms of income to the employee portion of FICA (7.65%) including: realized capital gains from non-employer-paid stock purchases, rents and royalties, and interest income. Expanding coverage to these forms of income would capture a larger base and account for the types of income that flow toward the wealthiest individuals rather than the middle class, making it more progressive rather than regressive. This plan would also account for nearly all (93%) of national income.

Removing FICA and SECA Taxable Income Caps

The final change involves removing the current $168,600 annual cap on taxable incomes subject to FICA and SECA. Eliminating this cap would immediately make these taxes less regressive and more proportional as it would cover the same proportion of income at all levels for all individuals. CBO estimates project revenues could increase by nearly $1 trillion over 10 years if this cap were to be lifted and current tax rates kept in place.vii Under this new proposal, the program becomes much more redistributive and requires wealthier taxpayers, who will likely not receive benefits due to their high incomes, to pay for the benefits of those who will.

The problem facing policymakers regarding Social Security is not without solutions. Many feel that there is no fix to this deep-rooted problem, but with the right political mindset and a financial understanding of the right solutions, changes can be made to save the Social Security and other social assistance programs. There are of course drawbacks to each of the solutions proposed. Broader and more detailed studies could likely analyze these and project their impact. Though this type of cost-benefit analysis is essential, it can only go so far. Creating a progressive tax system will ultimately require building a broad coalition of support and ensuring our elected officials take action. In a year in which the Presidential election looms, there is no better time to put forward tough but honest policy solutions to the biggest problems facing our country.

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