On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act, a piece of legislation that remains popular 90 years after its introduction.
Each month, the program provides retirees benefits, covering about half of most recipients’ overall income and about 75 percent of income received by the poorest beneficiaries. Social Security benefits lift nearly 17 million older adults out of poverty. And if a worker becomes disabled or dies prematurely, Social Security provides them or their family with payments to help cover housing costs, grocery bills, and other necessities.
But after 90 years, Social Security needs a tune-up. As a large cohort of older Americans retire and collect Social Security, benefit disbursements are increasing faster than revenues. The program’s trustees estimate that by 2033, Social Security will have insufficient resources to cover all scheduled retirement benefits. If Congress doesn’t act, retirees could see about a 20 percent cut in their monthly benefits within a decade.
To prevent such a cut, Congress can raise revenues or trim future benefits. No matter which financing solution Congress adopts, lawmakers should also account for the growth in earnings inequality and life expectancy that is suppressing program revenue and tilting benefits toward affluent beneficiaries. By adjusting the benefit formula and requiring high earners to contribute more, federal policymakers could slow the growth of benefits for the highest earners and provide greater subsidies to retirees with low incomes and disabled adults. This rebalancing would improve the financial security of low-income beneficiaries while still rewarding higher earners.
Growing wage inequality has reduced Social Security revenues
About 94 percent of Social Security’s noninterest revenue comes from payroll taxes paid by covered workers and their employers. (The rest comes from income taxes paid on Social Security benefits.) The program taxes earnings only up to a certain threshold each year. That tax cap, set at $176,100 in 2025, increases with average national earnings.
But because wages have increased more rapidly near the top of the distribution than near the middle and bottom, only 83 percent of earnings nationwide now contribute to Social Security revenues, down from 90 percent in 1983, the last time Congress confronted the program’s financial problems. This trend diminishes Social Security’s revenues and worsens its financial condition, putting future benefits at risk. By one estimate, if 90 percent of overall earnings had been subject to Social Security payroll taxes since 1983, the program’s long-term financing gap would be about 25 percent lower today.
Annual Social Security benefits for high-wage workers are soaring
The current formula for Social Security benefits sets monthly amounts equal to a fraction of past monthly earnings, averaged over a worker’s top 35 earning years. In 2025, the formula allocated benefits equal to 90 percent of the first $1,226 of average monthly earnings, 32 percent of average earnings between $1,227 and $7,391, and 15 percent of average earnings above $7,391.
Given the formula’s structure, continued strong earnings growth for high-wage workers will expand the benefit gap between high- and low-wage workers, according to projections from the Urban Institute’s Dynamic Simulation of Income Model. Our projections show that annual Social Security benefits will increase for all workers because wages will grow faster than prices. High-wage workers will experience the largest benefit gains because we project that their wages will increase most and they are likely to have better health that allows them to work longer and receive more years of benefits.
If Social Security pays all scheduled benefits through 2070, we project that the median annual after-tax benefit for those with the top 20 percent of lifetime earnings will increase by $22,100 in inflation-adjusted dollars. By contrast, median benefits will increase only $13,900 for the middle 20 percent of earners and only $7,200 for the bottom 20 percent of earners.
Longevity inequality worsens benefit disparities
Lifetime Social Security benefits, which are a better measure than annual benefits of how much people gain from the program, are tilting heavily toward high-wage workers. Life expectancy increases with income, so higher-income beneficiaries tend to collect benefits longer than people with lower incomes, and that gap continues to grow (PDF).
Among the top 20 percent of earners, we project a median life expectancy of 91 years for those born in the 1990s, four years more than for those born in the 1950s. For the bottom 20 percent of earners, projected median life expectancy is only 80 years for those born in the 1990s, the same as for those born in the 1950s.
Combined, the growth in wage inequality and higher life expectancies for high-wage workers are worsening disparities in lifetime benefits and reducing the share of Social Security benefits that go to retirees and disabled people with lower incomes. If all currently scheduled benefits are paid, we project that median lifetime Social Security benefits for beneficiaries in the top 20 percent of lifetime earnings will reach $904,500 (in 2025 inflation-adjusted dollars) for those born in the 1990s, $380,100 more than for those born in the 1950s. By contrast, the projected gain in lifetime benefits for people born in the 1990s is only $79,100 among the bottom 20 percent of earners.
What can federal policymakers do?
As Congress chooses among the various options to close Social Security’s long-term financing gap, it can mitigate the effects of growing inequality on low-income beneficiaries. Two options seem especially promising.
- Raise the payroll tax cap. Recent polling shows that the American public favors rebalancing Social Security by increasing revenue streams, especially by raising the payroll tax cap. Congress could increase the tax cap to cover 90 percent of earnings and then adjust the cap periodically to maintain that level. Congress could even eliminate the cap, subjecting all earnings to the payroll tax. Both changes would make higher-wage workers contribute more to Social Security.
- Make the benefit formula more progressive. Congress could also adjust Social Security’s benefit formula to direct a smaller portion of benefits to higher-income people. By reducing the 15 percent replacement rate for the top portion of earnings or adding another lower rate for the highest earners, Congress could trim benefits allocated to high-wage workers.
Given the sharp projected increase in Social Security benefits for highly paid workers, trimming those benefits and requiring high-wage workers to contribute more to the program merit serious consideration. Those changes would maintain Social Security’s progressive design and help ensure the program can provide critical financial support to retirees, people with disabilities, and their families and dependents for decades to come.
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