Growing U.S. inequality is worsening Social Security’s financial crunch, group says
Social Security is facing a funding crisis, and while demographics are often blamed for the program’s financial woes, widening income inequality is also a major factor. In recent decades, the incomes of higher-paid Americans have soared, outpacing the wage growth of low- and middle-class workers. This poses a problem for Social Security because the program only taxes earnings up to $184,500, missing out on much of the income growth among top earners.
According to the latest trustees’ report, Social Security’s revenue base is eroding as a result of income inequality. The share of total wages subject to Social Security taxes has decreased from almost 87% in 1984 to around 83% today, largely due to the faster income growth among high earners. This has led to more of their income escaping Social Security taxation, putting a strain on the program’s finances.
One proposed solution to bolster Social Security is eliminating the $184,500 tax cap, which would require high-income Americans to contribute more to support the program. Without such changes, Social Security’s trust fund is projected to become insolvent by the end of 2032, leading to a 22% cut in monthly benefits for beneficiaries.
How Inequality Weakens Social Security
In 1983, lawmakers made significant changes to Social Security to address financial challenges, but they did not adjust the tax cap on wages to reflect shifts in the labor market. As higher earners outpaced other workers in income growth, more of their earnings escaped the payroll tax, inadvertently starving the trust fund of necessary revenue.
Real earnings for the top 6% of American workers rose by 62% from 1983 to 2000, while the remaining 94% saw average gains of 17%. This disparity in wage growth has contributed to the erosion of Social Security’s revenue base over the years.
Removing the Tax Cap
The tax cap, in place since the program’s inception, is frequently cited in proposals to strengthen Social Security. Some plans suggest phasing out the cap gradually, while others propose creating a “donut hole” for higher earners. Removing or phasing out the tax cap could close a significant portion of the program’s funding gap, according to the Social Security Administration’s analysis.
Another option is to implement automatic triggers that adjust the taxable maximum based on revenue projections. This proactive approach could help maintain the program’s financial stability and ensure that benefits are not cut for beneficiaries.
Social Security is a critical program that can be fixed with the right policy changes. Most Americans support solutions that do not involve benefit reductions, highlighting the importance of addressing income inequality and revenue challenges facing the program.
