There's Another Reason Social Security Is Running Short - And It's Often Overlooked

The Social Security program, which provides benefits for seniors that millions of retirees depend on, faces a financial shortfall. While the shortfall is often attributed to an aging population and falling birth rates, there's a second, potentially even larger cause at hand: Income inequality.

As portions of the population experience tremendous wealth while others are left far behind, the payroll tax income helping fund the program suffers. Here are the many factors contributing to the issue.

The traditional explanation behind Social Security's financial shortfall

The 2026 Social Security Trustees Report projects that the Old-Age and Survivors Insurance (OASI) trust fund may become depleted by the fourth quarter of 2032. Part of the program's revenue comes from payroll taxes, and the upcoming depletion is often blamed on the large aging population paired with declining birth rates.

During the baby boom era of 1946 to 1965, birth rates rose significantly; there were 3.68 births per woman in 1957. The high birth rate resulted in a large population of baby boomers, many of whom are collecting or are about to collect Social Security.

But by 2023, the birth rate had dropped to 1.6 births per woman. Since there are fewer people being born, there are now fewer workers paying taxes into the Social Security program, which must pay benefits to the larger baby boomer population.

The issue of income inequality and the payroll tax cap

A declining birth rate and higher senior population aren't the only factors contributing to Social Security's financial shortfall. Income inequality, especially when paired with the program's payroll tax cap, is also to blame.

Social Security payroll taxes only apply to an individual's annual income up to a certain threshold. For 2026, that payroll tax cap is $184,500. Any income an individual earns above that cap isn't taxed for Social Security.

If workers' incomes rise above the tax cap, the Social Security program loses out on that potential income.

How the economy and incomes changed after 1983

In 1983, Congress implemented Social Security reforms in an effort to keep the program solvent for 75 years. And for a while, those reforms worked, until the economy changed. The reforms implemented were based on the assumption that income growth would be broadly shared across workers, resulting in consistent funding for the program.

Over time, income growth became more concentrated amongst top earners. Between 1983 and 2000, the top approximately 6% of earners saw their earnings grow much faster than everyone else, reports the Roosevelt Institute. Since earnings above the payroll tax cap aren't taxed by the program, more of that growth went untaxed. The Social Security program not only missed out on revenue, but also on the interest it could have earned while building up the program's reserves.

The challenge of supporting more beneficiaries with less revenue

Income inequality has resulted in a situation where Social Security must support more beneficiaries with less revenue. According to the latest Social Security Trustees Report, in 1984, 87% of wages were subject to the payroll tax. By 2000, approximately 85% of wages were subject to the tax, and by 2026, that figure had dropped again to 83%.

As the size of the population claiming benefits has increased, the picture has become bleaker. Data from the Bipartisan Policy Center indicates that the ratio of workers to Social Security beneficiaries has also declined over the past few decades. In 1960, there were five workers per retiree. By 2026, that figure had dropped to 2.9 workers per retiree. The Bipartisan Policy Center projects that by 2070, there may be as few as 2.2 workers per retiree.

The projected Social Security trust fund insolvency and its implications

The 2026 Social Security Trustees Report projects that the OASI trust fund may become depleted by the fourth quarter of 2032, which is one quarter earlier than the 2025 report projected. If the fund becomes depleted, the program's income may only be enough to pay 78% of total scheduled benefits, meaning benefits might be automatically cut by approximately 22%.

As of May 2026, Social Security benefits average $2,083 per month. A 22% reduction would leave retirees with $1,625 per month. In six years, after cost-of-living adjustments have likely repeatedly raised benefit amounts, the reduction could be even more significant.

Potential solutions to Social Security's insolvency

The pressure is on Congress to implement a solution to Social Security's insolvency. Legislators have proposed numerous potential fixes, including eliminating the payroll tax cap or significantly raising its threshold to increase revenue for the program. Legislators have also proposed creating a "donut hole" in which high incomes above a second threshold are taxed again.

Bottom line

Congress has not yet implemented a solution to keep Social Security solvent. Even fully removing the income tax cap only solves part of the financial gap, so it's possible that the final solution might be a combination of reforms. The future of Social Security is currently uncertain, but as the insolvency date gets nearer, the pressure on Congress to find a solution increases.

If Social Security benefits are a significant part of your retirement budget, this is a good time to stress-test that budget to see how you might fare with a smaller benefit amount, just in case benefits are reduced. Doing some calculations may help you see where you stand financially so you may make any needed adjustments.

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