The Rising Toll of Inequality on Social Security
Class warfare has stormed into the Social Security debate. As of Feb. 12, a provocative report says, people on track to earn $1 million in wage income in 2015 will have paid all of their Social Security payroll taxes for the year.
This statement appeared in a report this week from the Center for American Progress, which describes itself as a progressive think tank. It is a straightforward calculation: Up to $118,500 of wage income is subject to Social Security taxes this year, and anyone earning $1 million will have passed this payroll tax ceiling on that date.
Math aside, the CAP report takes a direct shot at wealthier Americans for failing to contribute their fair share in Social Security payroll taxes. You can expect more such attacks, which are both understandable and, as I’ll explain, regrettable.
The report accurately notes that the growing wage gap between richer and poorer folks in this country has resulted in a shrinking share of national wages being taxed to fund Social Security. Wage gains among wealthier workers have outpaced gains among lower-income taxpayers. Social Security’s annual cap on earnings subject to payroll taxes rises each year to reflect annual changes in national wages. Because these gains have been skewed toward the rich for many years, more and more of their income escapes payroll taxes.
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This is a big problem for Social Security and needs to be addressed. The payroll tax system used to capture 90% of all wage income in the country. Now, according to the CAP report, it captures only 83%. And while the 7 percentage point gap may seem small, it is hardly that.
If the top wage for Social Security taxes had remained at 90% of national wages, the report estimates, the beleaguered Social Security trust fund would have $1.1 trillion more to pay out in future Social Security benefits. Also, productivity gains among workers have outpaced their wage gains. If wage gains had risen to match worker productivity increases—an emotionally if not economically satisfying premise—another $750 billion would have been added to the trust fund, according to CAP.
“Millionaire and billionaire earners stop contributing to Social Security early in the year, while the average worker contributes all year long,” the report says. “While policymakers cannot undo the past, they can take action to improve Social Security’s fiscal outlook by implementing policies that boost wages, combat rising inequality, and modernize the program’s revenue structure to reflect today’s economy.”
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Rising economic inequality has become the hot button of national economic policy. And I’m all for such a debate. This imbalance long ago began to tear apart the social bonds that helped make this country what it is, or rather what it was.
It would, however, be a mistake to further turn Social Security into a tax-and-income-redistribution program. Why do I say “further”? Because Social Security benefits already are highly progressive.
People with low incomes receive a much higher percentage of their wages back in the form of benefit payments than do higher earners. This causes them to receive a lot more in benefits from Social Security than they ever pay into the program via payroll taxes. Program supporters rarely if ever acknowledge this progressivity. But it was the way the program was designed, and it’s worked very well.
On the upper end, the wages that exceed each year’s payroll tax cap do not entitle their earners to a single extra penny of Social Security benefits. They get absolutely no credit from Social Security for these earnings. Critics of the program leave the impression that rich people are somehow getting something for free from Social Security. But that’s not the case, and this also is the way the program was designed.
So a person who makes $1,118,500 or $2,118,500 or $3,118,500 will earn the same amount of future Social Security benefits this year as the person who makes $118,500. They won’t get something for nothing. They will get benefits that match what they paid in payroll taxes, just like everyone else.
This treatment has long been one of the strengths of the program. It would be a shame if we turned an equitable benefits program into an inequitable tax-the-rich program. If you believe wealthier Americans should pay higher taxes, fine. Change the tax code by raising their rates and closing loopholes that benefit primarily the rich. Don’t take a retirement program with historically broad social support and turn it into something it was not designed to be.
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Having said that, there is little doubt that AARP and other supporters of expanded retirement benefits look favorably on asking wealthier Americans to play a larger role in reestablishing the financial sufficiency of Social Security. As matters now stand, the program will be able to meet all its obligations until 2033 and will then be able to pay only 77% of claims.
Simply raising the payroll tax ceiling until it once again covers 90% of U.S. wages would solve up to a third of the projected program deficit over the next 75 years. (Social Security is required by law to use a 75-year window for evaluating its financial condition.)
A detailed assessment of possible program changes maintained by the Social Security Administration includes some 120 measures that, in combination, would easily create 75-year solvency if not surpluses. These solutions should be broad-based. They should not single out any group, even if that group happens to be wealthy Americans who we are more and more loving to hate.
Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published next week by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.