An Employer Compensation Tax for Social Security and Medicare | Committee for a Responsible Federal Budget

Restoring Solvency to Social Security and Medicare Trust Funds

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.

Without action, retirees face an automatic 24 percent benefit cut in 2032, while Medicare hospital payments would be cut by 12 percent.

Restoring solvency to these trust funds will require slowing benefit growth, lowering health care costs, increasing revenue, or some combination.

Current Financing of Trust Funds

The Social Security and Medicare trust funds are financed primarily by a 15.3 percent payroll tax on wages, split evenly between worker and employer, with the 12.4 percent Social Security tax applied only to the first $176,100 of annual wages in 2025.

Proposed Alternative: Employer Compensation Tax

Proposals to boost revenue often involve increasing the tax rate or the tax cap. This Trust Fund Solutions Initiative white paper suggests a new alternative – replacing the employer side of the payroll tax with a flat Employer Compensation Tax (ECT) on all employer compensation costs.

No action will result in automatic cuts.

Author's summary: Social Security and Medicare trust funds are approaching insolvency.

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Committee for a Responsible Federal Budget Committee for a Responsible Federal Budget — 2025-10-16

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