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By Suzanne Blake
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Social Security’s looming funding crisis is often attributed to America’s aging population and lower birth rates. But recent data from the program indicate another major factor is accelerating the program’s financial strain: income inequality.
A rising share of income is going to high earners whose wages increasingly fall above the payroll tax cap, which is currently set at $184,500 for 2026. That means a growing portion of national income is not being taxed to fund Social Security. As a result, the program’s revenue base is shrinking relative to overall wage growth, and benefit cuts could become more likely if lawmakers fail to act.
“Incomes on the lower end are not bringing in enough of a tax base given the fact they have not risen as fast as higher incomes, which are beyond the cap,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek. “Thus, dollars funding social security in ‘real terms’ has been declining while the overall Social Security benefit rises with inflation.”
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Why It Matters
Social Security is a primary source of income for tens of millions of Americans. It is primarily funded through payroll taxes, but only earnings below a fixed threshold are taxed.
More than 70 million people rely on Social Security benefits, and the program is considered the nation’s most effective anti-poverty tool for older Americans and disabled workers.
Share of US Wages Subject to Social Security Tax
As inequality has widened, high earners have captured a larger share of overall wage gains. Because much of that income is above the cap, it escapes Social Security taxes.
In 1984, the share of wages subject to payroll taxes was 87 percent, but currently it’s only at 83 percent, according to Social Security’s latest trustees' report. This seemingly small shift represents billions in lost annual revenue for the system.
Year % of Wages Taxed
1984 ████████████████████████████ 87%
2000 ██████████████████████████ 85% (approximately)
2026 ████████████████████████ 83%
Social Security Insolvency Timeline and Expected Benefit Cuts
The revenue shortfall comes as demographic shifts already place unprecedented strain on the system. According to data from the Bipartisan Policy Center, the ratio of U.S. workers to Social Security beneficiaries has steadily declined over the last several decades.
Without legislative intervention, the financial consequences of these combined pressures are expected to hit a critical tipping point in the near future. The trustees' report projects that the Social Security trust fund will face insolvency by 2032.
If the fund is depleted, the program would only generate enough revenue to pay 78 percent of scheduled benefits, resulting in an estimated 22 percent across-the-board cut. For the average beneficiary, that could translate to a reduction of about $500 per month.
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Could Raising or Eliminating the Tax Cap Fix Social Security?
Many policymakers and advocates have proposed adjusting the payroll tax cap to capture more revenue from high-income earners. Specific legislative options under discussion include:
- Eliminating the cap entirely
- Raising the threshold significantly
- Creating a “donut hole” where high incomes are taxed again above a second threshold
“The viable solution is multifaceted. It will have to come with a combination of higher taxes, raising caps, possibly increasing retirement ages, and actually increasing real wages,” Thompson told Newsweek. “According to some estimates, the cap removal roughly solves one half of the problem, which leaves a massive hole to fill.”
During an interview with The Hill on NewsNation, cited by an earlier Newsweek article, former Social Security Administration Commissioner Martin O’Malley also advocated raising or eliminating the payroll tax cap, arguing that the current structure disproportionately benefits top earners.
He said only 6 percent of Americans "experience any benefit” from the current limit on taxable earnings, and most “think it is unfair that wealthy people don’t pay the same tax rate as a custodian in a school or a teacher.” He believes it's a “an entirely solvable problem,” that can be sorted it lawmakers "scrap the cap."
His comments reflect a broader argument that increasing contributions from higher-income workers could help close the program’s funding gap without reducing benefits.
Former Labor Secretary Robert Reich also made a similar case, linking Social Security’s challenges directly to rising income inequality and the cap on taxable wages. Reich described the fix as "obvious," saying that removing the cap on income subject to Social Security taxes is the "only way to reverse" the program’s current financial path.
What This Means for Americans
For current retirees, Social Security benefits are unlikely to disappear, but cuts of around 20 percent are possible after 2032 if no new reforms are passed.
And for younger workers, uncertainty about future benefits is increasing. Much of the policy decisions in the next few years will determine their long-term payouts.
“It's important to understand that insolvency does not mean Social Security disappears, but without action it could mean a sudden, across-the-board benefit reduction that would be devastating for retirees who rely on those benefits for basic expenses,” Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.
What Happens Next
As the depletion deadline approaches, policymakers from both parties remain divided.
Near-term proposals generally fall into two categories: raising revenue through tax rate hikes or higher income caps, or reducing benefits by altering cost-of-living adjustments and raising the retirement age. A bipartisan consensus on which path Congress will take has yet to emerge.
Contact Newsweek editors on this story: Jason Lemon and Anthony Murray.
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