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Income gap and Social Security

October 7, 2010 - Jim Anderson
In a July 27, 2009, post, “Payroll tax ceiling hasn’t kept pace,” I discussed one of the most under-reported dilemmas of Social Security.

As the U.S. income gap continues to widen, a smaller percentage of the nation’s income is available to help fund the Social Security system.

A little more than a year ago, the Wall Street Journal analyzed Social Security Administration data from 2007.

Figures showed that the percentage of total wages subject to payroll taxes in the U.S. had shrunk to 83 percent, down from 90 percent in 1982.

That’s because an ever increasing amount of wages went to people making more than Social Security payroll cap, the level at which annual earnings are no longer subject to Social Security taxes. (The current ceiling is $106,800.)

Recently, the U.S. Census Bureau reported that the income gap in the U.S. continues to widen.

The margin between the richest and poorest Americans grew in 2009 to its largest spread ever. The top-earning 20 percent of Americans — those making more than $100,000 each year — received 49.4 percent of all income generated in the U.S.

That compares with 3.4 percent made by the bottom 20 percent of earners.

Social Security has worked and continues to work. Its administrative costs are low. And, according to the Congressional Budget Office, even without changes Social Security will remain sound until 2039.

By that year, however, payroll taxes collected may be enough to pay only about 76 percent of scheduled benefits.

Some observers (on the right) say this problem should be “solved” through privatization, or the creation of personal investment accounts.

Others (on the left) say the payroll ceiling should be lifted entirely.

Perhaps the most under-reported solution is to strengthen pay for the 80 percent of workers making less than $100,000 per year.

Otherwise, if the U.S. income gap continues to widen, inflation-based increases in the payroll ceiling will be insufficient to stem the flow of dollars away from Social Security.

How do we strengthen pay for those earning less than $100,000?

Simply talking about it — without someone screaming “Marxist redistributionist” — seems like a good place to start.

According to the Wall Street Journal analysis, over the five-year period from 2002 to 2007, wages for those earning more than the Social Security threshold rose about twice as fast as for those below.



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