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How Income Inequality Helped Create Social Security’s Funding Shortfall

New AARP research finds the program’s trust funds would have remained solvent for 25 more years if not for dramatic shifts in U.S. earnings

7-minute read

Deirdre Shesgreen,

AARP

Published November 10, 2026

People placing building blocks onto a large Social Security structure.

Rob Dobi

Key takeaways

More income now goes to high earners whose pay exceeds Social Security’s tax cap and investors whose profits are not subject to Social Security taxes.
Social Security could have collected another $10.8 trillion over five decades in payroll taxes if not for the growing gap in earnings.
Proposals in Congress would capture more tax revenue from high earners without affecting lower- or middle-income taxpayers.

Amid the debate over Social Security’s funding shortfall, two demographic trends tend to grab the most attention: America’s declining fertility rate and its growing older population.

But that framing leaves out a major contributor to the current strain on Social Security’s trust funds: economic shifts, including income inequality, as well as growing investment returns and corporate profits.

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A new research paper from the AARP Public Policy Institute (PPI) shows that Social Security’s trust funds, currently projected to deplete their reserve funds by 2034, would have remained solvent for an extra 25 years if not for a seismic shift in income patterns over the past four decades.

“There is more income going to high-wage workers that is not captured by Social Security,” says Rich Johnson, vice president of financial security with PPI and the report’s author.

That’s because of the annual limit on how much of a worker’s earnings are taxed for Social Security, he says. While U.S. wages have risen across the board, the biggest gains are concentrated at the top of the income scale, meaning far more of Americans’ collective earnings escape being taxed to support Social Security compared with four decades ago.

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There’s also comparatively more income going to owners of capital, including businesses that report earnings as corporate profits instead of as income, and “they’re not contributing to Social Security, either,” Johnson says. His analysis finds that corporate profits and investment returns — which are not taxed for the purposes of Social Security — have grown faster than compensation for workers.

The program would have collected another $10.8 trillion in revenue between 1984 and 2034 if not for this massive shift in income patterns, the AARP paper concludes.

‘The economy changed’

The findings come as Congress begins to debate how to address Social Security’s funding gap. If lawmakers don’t act before 2034, the surplus in Social Security’s two trust funds will run dry. At that point, incoming revenue will only be enough to cover about 80 percent of benefits.

Johnson says the paper’s findings can help frame the debate, giving policymakers and the public a fresh understanding of the reason for the program’s current fiscal state.

“A lot of attention has been focused on the changing demographics — that there are simply a growing number of retirees relative to workers paying into the system,” he says. “We are pointing out that there’s been a shift in income, [and] that has important implications for Social Security's finances.”

Bill Sweeney, AARP’s senior vice president for government affairs, says the report should alter the current political conversation around Social Security’s future.

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“There are groups in Washington peddling the idea that we should raise the retirement age and cut Social Security. This report blows a hole in their argument,” Sweeney says. “Social Security isn’t facing insolvency because retirees are taking out too much; it happened because the economy changed and Congress never took action to keep up with it.”

Social Security is primarily funded through a 12.4 percent payroll tax on earnings up to a statutory cap that is adjusted annually to reflect wage trends. Salaried and hourly workers split the tax with their employer, paying 6.2 percent each; self-employed people pay both shares. Other types of income besides earnings — such as interest income and business income — are not taxed for Social Security.

For 2026, any earnings above $184,500 are not subject to the tax. (In 2027, the cap will tick up from $184,500 to $192,300.)

“Earnings above the cap have grown rapidly, driven by rising wages among high-income workers,” Johnson writes in the paper.

Boomer retirements were not a surprise

Johnson highlights research from the American Enterprise Institute, a Washington-based think tank, showing that from 1979 to 2019, inflation-adjusted wage and salary income increased by 41 percent for workers at the 90th percentile of the income scale compared with 7 percent for those at the 10th percentile. And from 1979 to 2024, the share of income held by top earners — such as a three-person family with annual income of $400,000 or more — “exploded” from 2 percent to 19 percent, the paper states.

The last major restructuring of Social Security’s finances came in 1983, when Congress passed a package of reforms that Social Security Administration (SSA) actuaries believed would keep the program solvent for at least 75 years, to 2058. These included subjecting some benefits to income taxes, accelerating a planned bump in the payroll tax and gradually increasing the full retirement age — the age at which workers can claim 100 percent of the Social Security benefit calculated from their earnings history — from 65 to 67.

Those experts “obviously were aware of the existence of baby boomers in 1983” and included that anticipated wave of retirements in their projections, says Stephen Nuñez, director of stratification economics at the Roosevelt Institute, a nonprofit research group. In fact, he says, the actuaries got almost everything right in 1983 — but they could not foresee the rise in income inequality and the depth of the 2007–2008 Great Recession.

Nuñez published his own analysis in January 2026 which found that when Congress passed the 1983 reforms, 90 percent of all eligible earnings were captured by the payroll tax. Projections of 75-year solvency were based on that remaining the norm.

However, due to income gains being concentrated among a small slice of top earners, the share of income captured by the payroll tax dropped to about 82 percent by 2000, his study found. As a result, the SSA had to begin drawing down the trust fund reserves sooner than anticipated to fully meet its benefit obligations.

The current shortfall is widely pinned on the boomer retirement wave, rather than the economic shifts, which is “very frustrating,” Nuñez says.

Congress weighs changes to tax cap

AARP’s research also documents a shift from compensation earned by workers, called “labor income,” to corporate profits and investment returns.

“Tasks once performed by workers are becoming increasingly automated, limiting the demand for workers, reducing payrolls, and shifting income to owners of capital,” the PPI paper notes. “The growth in the market power of large, highly productive firms that earn outsize profits and employ less labor is also shifting income away from workers.”

The AARP paper does not endorse any specific solutions to address the loss of Social Security revenue due to income inequality, but it does note several bills before Congress that would capture more income from high earners, including the Social Security 2100 Act, the Social Security Expansion Act and the Medicare and Social Security Fair Share Act.

Those measures would raise or eliminate the payroll tax cap and subject investment income above a certain threshold to Social Security or Medicare taxes.

For example, the Social Security 2100 Act would eliminate the Social Security tax cap and add a tax on investment income for taxpayers making over $400,000. The latter would apply to income from stock-market gains, dividends, rental properties and other investment profits. It would not apply to retirement savings plans such as 401(k)s and IRAs.

These proposals “would not affect lower- or middle-income taxpayers,” Johnson says. “They would be protected.”

Sens. Bernie Moreno (R-Ohio) and Elizabeth Warren (D-Massachusetts) have also publicly proposed eliminating the payroll tax cap, but they have yet to introduce legislation. Sweeney says AARP is “in close conversations” with Moreno and Warren about their bipartisan proposal and welcomes the momentum around such ideas.

“Congress has hundreds of ways to protect Social Security without cutting it, and raising the tax cap has consistently been shown to be one of the ideas that is most supported by the public,” he says.

The key takeaways were created with the assistance of generative AI. An AARP editor reviewed and refined the content for accuracy and clarity.

Deirdre Shesgreen is an AARP writer and editor covering Social Security. She previously worked as a state news editor for the AARP Bulletin and as a reporter and editor at USA Today, the St. Louis Post-Dispatch and other publications.

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