Last month’s report from the Social Security trustees reminds us that we must soon fix the system’s finances to safeguard future benefits. One option that would help balance the system would be to raise the ceiling on earnings subject to Social Security’s payroll tax. Recently released data show that Social Security taxed only 82 percent of all earnings received in 2009. And in some of the nation’s wealthiest communities less than half of earnings were taxed.

Today workers and their employers each pay Social Security payroll taxes on annual earnings up to $110,100. That ceiling increases each year with the growth in average earnings. In 2009, the limit was $106,800. Because the tax base is capped, low-wage workers pay taxes on all of their earnings, whereas high-wage workers typically pay taxes on only part of their earnings.

This pattern is evident across communities. Wealthy New York County (better known as Manhattan) paid taxes on only 47.7 percent of all earnings received in 2009, the lowest proportion in the 100 counties with the most workers. More than half of earnings received that year in Manhattan, then, went to people who earned more than $106,800. Fairfield County in Connecticut, home to many of New York’s affluent bedroom communities, paid taxes on only a slightly larger share. Other counties in the bottom tenth include those that straddle Silicon Valley and those in some of the nation’s largest metropolitan areas, such as Chicago, San Francisco, Atlanta, and Boston.

Large Counties with the Lowest Share of Earnings Taxed by Social Security, 2009

Source: Author's calculations based on Social Security data.

Note: Restricted to the 100 largest counties in terms of 2009 employment.

On the opposite end of the spectrum, more than 9 out of 10 dollars earned in some other large counties were taxed by Social Security. The highest shares were paid by New York’s Bronx and Queens Counties, each separated by only a river from Manhattan, the county paying the lowest share. Counties in the Detroit metropolitan area (Macomb and Wayne), Indianapolis (Marion), Kansas City (Jackson), and Tucson (Pima) also paid disproportionate shares of their earnings to Social Security.

Large Counties with the Highest Share of Earnings Taxed by Social Security, 2009

Source: Author's calculations based on Social Security data.

Note: Restricted to the 100 largest counties in terms of 2009 employment.

These numbers highlight how unequally earnings are distributed across the nation. Inequality was even higher a few years earlier, before the financial crisis depressed pay received by the highest earners in 2009. Despite that slight improvement, inequality is much worse today than 30 years ago. Back in 1983, nearly 90 percent of all earnings were subject to Social Security taxes. But that share has plunged over time—even though the earnings cap rises with average wages—because earnings at the very top have surged.

Growing inequality matters for Social Security. The Social Security Administration estimates that setting the earnings cap to cover 90 percent of all earnings would eliminate between about a third and a half of the system’s long-term actuarial imbalance, depending on whether benefits were credited for the additional taxes paid. But the effects on individual taxpayers would vary widely across the nation.