- When could Social Security benefits be cut?
- Why Social Security payroll tax revenue has fallen behind GDP
- Rising income inequality reduces taxable earnings
- Could raising the Social Security tax cap prevent benefit cuts?
- Could Congress raise the Social Security payroll tax rate?
- What the Social Security funding gap means for retirees
Social Security’s financial position has weakened as the share of the US economy subject to payroll taxation has declined, according to new research from the AARP Public Policy Institute.
The report finds that taxable payroll, the primary source of funding for retirement and disability benefits, fell from 41% of gross domestic product in 1983 to 34% in 2025.
The decline reflects changes in how Americans earn income, including a greater proportion of business profits and investment returns that generally fall outside Social Security payroll taxation.
- Social Security’s retirement trust fund is projected to run out of reserves in 2032, leaving enough incoming revenue to pay 78% of scheduled benefits. The combined retirement and disability funds face depletion in 2034.
- Taxable payroll declined from 41% of US GDP in 1983 to 34% in 2025. AARP estimates that maintaining the earlier share could have generated an additional $10.8 tn between 1984 and 2034.
- Raising or eliminating the payroll tax cap could address up to 67% of Social Security’s 75-year financing shortfall, while taxing certain investment income could close another 25%.
AARP estimates that if taxable payroll had maintained its 1983 share of GDP, the program could have continued paying full scheduled benefits until 2059, approximately 25 years beyond the latest projected depletion date for the combined trust funds.
The findings come as Social Security’s trustees warn that the retirement trust fund could exhaust its reserves in 2032, potentially reducing payable benefits to 78% of scheduled amounts unless Congress changes the program’s financing.
“Social Security’s finances have weakened not simply because America has grown older, but because the economy has changed, while the program’s revenue system has not,” AARP Public Policy Institute stated.
When could Social Security benefits be cut?
The Social Security trustees’ June 2026 report projects that the Old-Age and Survivors Insurance (OASI) Trust Fund, which finances retirement and survivor benefits, will deplete its reserves in the fourth quarter of 2032.
At that point, continuing payroll tax income would be sufficient to cover approximately 78% of scheduled benefits if lawmakers do not intervene.
The combined OASI and Disability Insurance (DI) trust funds are projected to exhaust their reserves in the third quarter of 2034. After that date, incoming revenue would cover approximately 83% of scheduled benefits. These projections do not mean Social Security would stop making payments. Payroll taxes would continue flowing into the system, but the program would lack sufficient resources to pay benefits in full under existing law.
AARP used the 2034 combined-fund projection in its analysis because Congress has previously transferred resources between the retirement and disability funds.
| Social Security projection | Reserve depletion | Benefits payable |
|---|---|---|
| Retirement and survivors fund | Q4 2032 | 78% |
| Combined retirement and disability funds | Q3 2034 | 83% |
| AARP hypothetical with 1983 taxable payroll share | 2059 | Full scheduled benefits until depletion |
The projected financing problems are more severe than lawmakers anticipated during the last major Social Security reforms in 1983.
Those changes included a gradual increase in the full retirement age from 65 to 67, a six-month delay in cost-of-living adjustments and federal income taxation of certain Social Security benefits.
Research cited by AARP indicates that the reforms have reduced lifetime retirement benefits by approximately 19% for people turning 65 in 2026 compared with the benefits they would have received under the previous rules.
Why Social Security payroll tax revenue has fallen behind GDP
Social Security receives most of its financing through payroll taxes imposed on workers’ earnings.
In 2025, payroll taxes accounted for 91% of program revenue, according to AARP. Interest income contributed 5%, while federal income taxes on benefits received by higher-income beneficiaries provided the remaining 4%.
The standard Social Security payroll tax rate is 12.4%, divided equally between employees and employers at 6.2% each.
The tax applies only to earnings below an annually adjusted maximum. In 2026, that threshold is $184,500, increasing to $192,300 in 2027.
AARP identifies changes in the composition of national income as a significant contributor to the program’s financing challenges.
A larger proportion of economic output now comes from business profits and investment income rather than wages subject to payroll taxation.
Automation has reduced labor requirements in some industries, while certain business structures allow owners to receive income as profits rather than employment compensation.
These changes have reduced the portion of GDP captured by Social Security’s existing revenue system. AARP estimates that maintaining taxable payroll at 41% of GDP between 1984 and 2034 would have generated an additional $10.8 tn in revenue, measured in inflation-adjusted 2025 dollars.
The research suggests that the decline in taxable payroll relative to economic output has materially contributed to the program’s long-term funding gap.
Rising income inequality reduces taxable earnings
The distribution of wages has also affected Social Security’s finances. When Congress enacted the 1983 reforms, policymakers expected the maximum taxable earnings threshold to continue covering approximately 90% of aggregate wages.
Research from the Roosevelt Institute indicates that the share of earnings subject to Social Security payroll taxes declined to around 83% by 2000 and has remained broadly stable near that level.
Because wages above the annual taxable maximum are exempt from Social Security payroll taxes, earnings growth concentrated among higher-paid workers does not produce a proportional increase in program revenue.
The payroll tax ceiling rises annually with average wages, but this adjustment does not fully capture changes in the distribution of earnings.
Demographic developments have added further pressure. AARP projects that the number of workers supporting each Social Security beneficiary will decline from 3.4 in 2000 to 2.4 by 2030.
Population aging and declining fertility rates are contributing to the reduction in the worker-to-beneficiary ratio, increasing the financing burden on a smaller relative workforce.
Could raising the Social Security tax cap prevent benefit cuts?
AARP identifies changes to the taxable earnings ceiling as one potential way to improve Social Security’s long-term finances.
The report suggests that lawmakers could increase contributions from higher-income workers without raising payroll taxes for most employees.
Only about 6% of individuals earned at or above the Social Security taxable maximum in 2024, according to AARP.
Several legislative proposals have sought to extend payroll taxation to higher earnings, including thresholds of $250,000 or $400,000. Other proposals would eliminate the taxable maximum entirely.
AARP estimates, based on Social Security Administration actuarial assessments, that removing the earnings cap could close approximately 67% of the program’s 75-year financing deficit if the additional contributions did not generate corresponding increases in future benefits.
The result depends on how legislation treats newly taxed earnings. Providing additional benefits in exchange for higher contributions would reduce the net financing improvement.
AARP has not endorsed a specific legislative proposal, but its research emphasizes revenue changes that would limit additional taxation of low- and moderate-income workers.
Taxing investment and business income could provide additional funding
Another proposal involves extending Social Security taxation to income sources that currently fall outside the payroll tax system.
AARP points to the increased use of pass-through businesses, including sole proprietorships, partnerships, limited liability companies and S corporations.
Income earned through these structures may be treated differently from conventional wages, depending on the business organization and the taxpayer’s role.
The report examines an additional tax on certain investment income received by active S corporation officers and limited partners.
According to actuarial research cited by AARP, a new 12.4% tax on this income could address approximately 25% of Social Security’s 75-year financing gap.
Such a measure would expand the program’s revenue base beyond conventional payroll earnings. The estimate represents the effect of a particular tax proposal rather than a general assessment of all investment income.
Could Congress raise the Social Security payroll tax rate?
Increasing the existing payroll tax rate represents another potential financing option, although it was not a central recommendation in AARP’s report. The current combined contribution rate is 12.4%, split equally between employees and employers.
Social Security’s trustees estimated that increasing the combined rate to 16.65% beginning in January 2026 would have been sufficient to maintain the combined program’s solvency over the 75-year projection period ending in 2100.
A national survey conducted in February by the University of Maryland School of Public Policy found public support for a more modest increase.
Among 2,509 adults surveyed, 62% supported gradually raising the employee payroll tax rate from 6.2% to 6.5%.
The survey measured support for a gradual adjustment rather than the substantially larger increase identified in the trustees’ solvency calculation.
Any increase in payroll taxes would require congressional legislation.
What the Social Security funding gap means for retirees
The projected depletion dates have implications for current beneficiaries and Americans approaching retirement.
Under the trustees’ projections, Social Security would continue collecting payroll taxes after its reserves were exhausted. The financing shortfall would affect the proportion of scheduled benefits that could be paid.
AARP argues that further benefit reductions would place additional pressure on retirees who depend heavily on monthly Social Security payments.
Individuals can review their earnings records and projected retirement benefits through a my Social Security account maintained by the Social Security Administration.
The agency’s retirement calculators allow workers to compare estimated payments based on their earnings histories and the age at which they begin claiming benefits. These estimates reflect existing benefit rules and should not be interpreted as guarantees against future legislative changes.
Changes in the composition and distribution of US income have reduced the share of economic activity contributing to payroll tax revenue. Under AARP’s estimates, maintaining the taxable payroll share established in 1983 would have extended the program’s ability to pay full scheduled benefits until 2059.
Congress has several potential revenue options, including higher taxable earnings thresholds, expanded taxation of business and investment income, and adjustments to payroll tax rates. Their effects on Social Security’s financing will depend on the specific legislative provisions adopted.
