Addressing Income Inequality and Social Security
The Tax Strategy
Many policy experts and commentators suggest a simple solution to Social Security's financial challenges: tax the higher earners. This approach, which dates back to the 1970s, is often justified by the argument that the wage growth of the super-rich has allowed revenue to escape the payroll tax. While it's true that the cap on taxable wages may need to change, this has more to do with Congress's inaction than the earnings of the super-rich.
The Shortfall
The current shortfall in the program has resulted in over $22.5 trillion in promised benefits that experts believe will not be paid. To address these financial imbalances, many argue that Congress should eliminate the cap on wages subject to the payroll tax.
Historical Context
In 1977, Congress structured the taxable wage cap to cover 90% of workers' wages. The plan was for this taxable maximum to rise with average wages, allowing the system to continue drawing payroll tax revenue from 90% of the overall wage base. However, this threshold was only briefly reached in 1983 before declining to the current level of about 82%. The reasons for this sharp decline and subsequent stabilization are not clear.
The Impact of Income Inequality
Activists argue that the program lost the revenue intended to keep it solvent due to this decline. The Economic Policy Institute, a left-leaning think tank, suggests that income inequality has cost the program $1.4 trillion, including interest. However, this analysis overlooks the fact that every dollar collected in payroll tax revenue creates future obligations in the form of larger checks for seniors. Chasing the revenue lost to income inequality would have resulted in higher costs today.
The Reality of the Situation
If Social Security increased the amount of wages subject to tax to cover 90% of all wages, the program would also have expanded the benefit formula at the same rate. This would have resulted in more generous payouts for everyone. As a result, the average retiree born in 1960 would have been eligible for a benefit check of nearly $40,000 per year instead of the current level of $25,465.
The Deterioration of Social Security
In 1983, policy experts believed that Social Security would be solvent until 2063. However, since then, the program has lost 30 years of projected solvency. Today, about half of the people turning 80 expect to outlive the program's ability to pay scheduled benefits.
The Illusion of Simple Answers
Policy experts and pundits currently propose a seemingly simple solution to Social Security's finances: Congress can solve up to 70% of the solvency problem by eliminating the cap on taxable wages. While this may sound like an easy solution, it may prove to be illusory as shifting economic forces disrupt even the best-laid plans.
Bottom Line
Before accepting these seemingly clear and simple answers, voters should consider the words of H.L. Mencken: "To every complex problem there is an answer that is clear, simple, and wrong." The issues surrounding Social Security and income inequality are complex and require thoughtful, nuanced solutions. What are your thoughts on this matter? Share this article with your friends and join the discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
