The Issue of Income Inequality in Social Security Benefits Is escalating, yet Taxing the Wealthy isn't the straightforward Answer as Portrayed
Social Security, a vital source of income for millions of retired Americans, is in a precarious financial position despite its significant impact on their financial well-being. According to Gallup's annual surveys, 80-90% of retirees require Social Security to cover their living expenses. However, this program, despite its importance, is facing a severe financial challenge.
The Trustees Report, published yearly by the Social Security Board of Trustees, estimates the program's long-term unfunded obligation shortfall at $23.2 trillion in 2024, a significant rise from the 2023 report's estimate. Although this doesn't signify an impending collapse or inability to pay benefits, the current payout schedule becomes unsustainable with annual cost-of-living adjustments (COLAs).
The cause of this growing deficit isn't due to popular myths like "congressional theft" or "undocumented migrants receiving benefits." Instead, it's a result of ongoing demographic shifts including a record-low U.S. birth rate, a 58% decline in net legal migration over 25 years, and escalating income inequality.
The U.S. workforce funds Social Security through a 12.4% payroll tax on earned income, covering both wages and salaries but excluding investment income. In 2025, all income from $0.01 to $176,100 is subject to this tax. While the majority of workers pay their full share, high earners with income exceeding the taxable earnings cap pay only half, as their employer covers the other half.
Decades of taxable earnings history have shown that wages and salary for high earners have been growing faster than the National Average Wage Index, which determines the annual increase of the taxable earnings cap. As a result, only 83% of earned income is subject to this tax now, closing down the gap from 90% in 1983. This widening income gap might be considered as cheating Social Security out of much-needed income.
However, increasing payroll taxation on high earners isn't a simple solution to correct this imbalance. Both President Biden and 2024 Democratic Party presidential nominee Kamala Harris have supported this, but taxing the 6% of Americans who earn more than the taxable earnings cap might result in them making adjustments to reduce their tax liability, including retiring earlier, working fewer hours, or shifting their income types.
In conclusion, Social Security's financial challenges are due to a combination of demographic trends and revenue shortfalls. Although taxing the rich can be an option, it is not the sole, quick-fix solution to resolve the long-term cash shortfall faced by the program.
Retirees may need to reevaluate their retirement finance plans due to the potential changes in Social Security benefits, considering the program's considerable financial problems. To alleviate some of the pressure on Social Security's finances, high-earners may need to contribute a larger portion of their income to the program, though this could potentially lead to adjustments in their earning and retirement patterns.
