Social Security's Funding Crisis: The Vanishing Paycheck

Pia Malaney, who works as the Associate Research Director at the Institute for New Economic Thinking, has taken a close look at the looming Social Security shortage that could start impacting benefits by 2032. This program, which relies heavily on payroll taxes, is facing challenges because a smaller slice of US income comes from wages. The 2026 Trustees Report predicts that the combined trust funds may run out by the third quarter of 2034, with OASI funds likely empty by late 2032, meaning only 78% of benefits can be paid. Significant shifts in demographics and the economy, like the drop in wage share of GDP from over 50% post-World War II to 51.9% in 2024, are identified as key issues. Additionally, capital gains and similar income don’t face payroll taxes, and the taxable maximum of $184,500 in 2026 only captures 83% of earnings, down from 90% in 1983. To address these challenges, options could include raising or removing the cap, increasing payroll tax rates, changing the retirement age, or taxing capital income. Malaney also points out that advancements in AI might further reduce labor’s share, complicating the current wage-based funding model. She stresses the need for lawmakers to rethink how they tax today’s economy instead of one from 1935.