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.
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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.
Retirement News: Almost 80% of Americans fear a retirement age increase — here’s the real reason why
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.
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Author Details
Josh Koebert
Josh Koebert has spent more than 16 years digging into the data behind how Americans earn, save, and retire. As a senior content marketer at FinanceBuzz, his work covers both ends of that challenge: the job market and real estate pressures that shape how much people can save, and the Social Security policies, 401(k) strategies, and retirement income gaps that determine what they’ll actually have when they get there.
