How Does Earnings Inequality Affect Social Security Financing?

Brief

How Does Earnings Inequality Affect Social Security Financing?

June 4, 2020

Abstract

Over the past four decades wages and salaries have grown more rapidly near the top of the earnings distribution than at the middle and bottom. This trend limits Social Security revenue because Social Security exempts from payroll taxes annual cash earnings above a certain level. Between 1983 and 2017, the share of earnings below Social Security’s taxable maximum fell from 90 percent to 83 percent, exacerbating Social Security’s financial problems. If 90 percent of earnings had been subject to Social Security payroll taxes since 1983, the system’s long-term financing gap would be 25 percent lower today.

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