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Income Inequality and its Effect on Social Security Finances
Social Security’s looming insolvency has several causes, ranging from the steadily increasing beneficiary life expectancy to the steady shrinking taxpaying workforce. But an even more significant factor in the projected acceleration of the combined trust funds’ point of full depletion—from 2056, as projected in the 1983 Social Security Amendments, to 2034 as currently projected by the Social Security Trustees—has been cited by Social Security Administration officials.
Specifically, Social Security’s actuaries have suggested that the decline in the ratio of taxable earnings to all payroll earnings has created a situation in which an unexpected amount of earnings is escaping payroll taxation. This is due to an increase in earnings of those exceeding the annual taxable maximum ($184,500 this year). They report the results of studies showing this ratio dropping from a projected level of near 90% to approximately 82.5%, with real wage growth for the top 6% earners outstripping the wage growth of the lower 94% by 45%. The effect on projected Social Security finances is dramatic, with 7.5% of a total payroll of roughly $15 trillion essentially escaping the 12.4% payroll tax.[1]
This phenomenon of income inequality is the subject of an article by CBS MoneyWatch associate managing editor Aimee Picchi, explaining the resulting drain on Social Security’s finances. She discusses recent proposals to eliminate or change the cap on taxable earnings, moves that could help close the funding gap cited by the Social Security trustees in their 2026 report to the President and Congress. Click here to read Ms. Picchi’s article…
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[1] https://www.ssa.gov/OACT/presentations/as_20251203.pdf