Social Security More Likely to Face Major Cuts Due to Growing Pay Inequality

While millions of Americans depend on Social Security benefits as part of their retirement plan, those benefits could be cut because of the growing issue of pay inequality. The 2026 Social Security Trustees Report projects that the trust fund used to help pay benefits may run out as early as the fourth quarter of 2032, at which point benefits may be automatically cut. Beneficiaries may be left to get by with less, and financially vulnerable households may be impacted.

While there are several factors impacting Social Security's looming insolvency, such as the sizable Baby Boomer population, growing pay inequality is having a significant effect.

The mechanics behind the problem

Social Security is funded by payroll taxes, but the program taxes annual earnings up to just $184,500. Any income exceeding that amount isn't taxed, which means the program misses out on potentially substantial income from high earners. As income inequality has grown and high earners are bringing in even larger incomes, Social Security is missing out on more and more revenue that could be generated by taxes.

The trustees report identifies the problem. According to the report, in 1984, the taxable share of United States wages was almost 87%. That rate has fallen to approximately 83% today. That shift may seem small, but it represents billions of dollars in lost annual revenue for the program.

What income inequality means for Social Security's outlook

Higher earners are pulling ahead of low- and medium-income earners, and as they do, more of their income isn't taxed by Social Security. According to a January 2026 report by the Roosevelt Institute, from 1983 to 2000, the real earnings of the top 6% of American workers increased by 62%. As the income gap widens, the program loses out on more revenue.

If the trust fund becomes insolvent, the funds could only be able to pay 78% of the total scheduled benefits, meaning benefits for 63 million Americans could be cut. The automatic 24% cut could reduce average monthly benefits by approximately $500 for the average recipient, which is more than the average retired household spends on groceries in a month.

What cutting Social Security might do

A $500 cut might lead to extensive hardship for seniors, disabled individuals, and spouses of deceased workers who depend on the benefits. According to the Center on Budget and Policy Priorities, Social Security helps keep 23.5 million adults and children above the poverty line, including 6.5 million individuals under age 65, and 1.1 million children. A benefits cut could mean that more people, especially older adults, fall into poverty.

The income inequality dynamic compounds existing pressure, making it harder to push that 2032 deadline back without significant legislative action.

Could the tax cap be eliminated

Numerous fixes to Social Security have been proposed, including the idea of raising or eliminating the tax cap. Eliminating the cap could mean that high earners might pay significantly more to the program in taxes, helping to sustain the program's revenue and potentially avoiding an automated benefits cut.

According to the Social Security Administration, removing or phasing out the income tax cap could generate enough revenue to close 22% to 67% of Social Security's funding gap.

A cost-of-living adjustment solution

Increasing or eliminating the tax cap isn't the only option. Adjusting the cost-of-living adjustment (COLA) calculation might also help keep the program solvent and avoid benefit cuts. It's possible for legislators to limit the COLA for middle- and upper-income earners, ensuring those most in need receive adequate benefits. Lower-income workers might have the full COLA applied to their benefits, while higher earners might receive a smaller percentage of the COLA.

Raising the Social Security normal retirement age

There's also been discussion about raising the Social Security normal retirement age. Currently, the retirement age is 67 for individuals born in 1960 and later, but increasing life expectancies mean that many beneficiaries collect benefits for longer periods of time. It's possible that legislators could choose to increase the normal retirement age again, such as by boosting it to 70 for individuals born in 1981 or later.

Bottom line

No bipartisan support for one single solution to Social Security's insolvency has emerged, but there's been lots of conversation and media coverage of the topic. Insolvency of the trust fund doesn't mean that Social Security benefits disappear, but that they may be reduced. Without Congressional action, an automatic across-the-board cut may become the default option, leaving many beneficiaries without the funds they depend on.

There's still time for Congress to implement a solution to the Social Security program, but it's also a good idea to plan ahead for retirement in case a benefits cut does occur. Consider evaluating your retirement plan and calculating your budget with a reduced benefits amount to make sure that you're fully prepared, just in case.