Social Security Update: Major Cuts More Likely Due to Growing Inequality
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."
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 U.S. 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.
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."
What This Means for Americans
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.
2026 NEWSWEEK DIGITAL LLC.
This story was originally published June 22, 2026 at 4:37 PM.