Our growing income inequality causes 43% of the projected Social Security shortfall

Upward redistribution of income — what we’ve been calling the “looting of the economy” by the billionaire CEO class — is responsible for at least 43% of the projected Social Security shortfall for the next 75 years.

Let that sink in. This is yet another way that the looters want the victims to pay for their victimhood and hold the looters lossless. The CEO class has worked for three decades to create an economy where working people have a far less share of the economic growth than they used to have. One of the results of that inequity was an unexpected shortfall in the income collected by Social Security.

Think about it — everyone could see that the big demographic shift, the baby-boom generation, would show up on schedule. They could see that in the 1950s. But who knew 30 years ago (1983, if you’re not subtracting quickly), when the last Social Security adjustment occurred, that Reagan, Clinton, Bush and Obama would create a bipartisan consensus around handing all the fruits of productivity to the “rich and famous” set that you’re not a part of? That was not part of the calculation in those golden Reagan Days, and the Social Security Trust Fund has suffered ever since.

What changed that they didn’t take into account?

As I said, they saw the baby-boomers coming from 10 miles away (or 50, if each mile is a year). The single item they didn’t account for was the increasingly-lower percent of income captured by the Social Security salary tax. In 1983, the year of the Greenspan commission, that share of income was 90%. Dean Baker, the source of this information (my emphasis):

In 1983, the Greenspan commission set the cap at a level where 90 percent of wage income would be subject to the tax, meaning that 10 percent would escape taxation[.]

Since that date, the upward redistribution of wages has increased the portion of wage income over the cap to 16.8 percent, with just 83.2 percent of wage income subject to the cap. The share going over the wage cap is projected to rise further, reaching 17.5 percent of wage income in a decade. In this way, the upward redistribution of income directly worsens the finances of the program.

Because wages are lower than they would have been without our ever-rising increase in income inequality, Social Security benefits are now lower as well:

If wages had kept pace with productivity growth over the last three decades, the typical workers would be paid around 25 percent more than they are now getting.

So the first two factors pull against each other, if you’re calculating the effect on the Trust Fund. Because of income that isn’t being captured by the salary tax, the Fund has lost money. But all of that lost money would not be still in the Fund; some would have been paid out in increased benefits (a good thing, don’t forget!).

The net result of these two factors is shown in this graph, again from Baker’s group, the Center for Economic and Policy Research (CEPR):

CEPR_SocialSecurityTaxes-and-Upward_Income-Redistribution

The blue line shows the lost revenue; if income were taxed up to 90% as it was in 1984, this additional money would be in the Trust Fund. The red line shows additional payments to SS recipients, who would have received more benefits, since benefits are paid according to income against which taxes were levied. The net of the two is considerable. Baker:

[The] net increase in revenue [would be] $42.4 billion, before counting the additional interest.

But wait, there’s more.

What’s that about “additional interest”?

Because the Social Security Trust Fund is currently running a surplus (it’s a rainy-day fund after all), it invests its money. The more money it has to invest, the more it earns on that money. If you had $42.4 billion more to invest, you’d be earning more as well, right? Same with the Trust Fund.

So Baker calculates that lost interest. Are you sitting down?

Taking the cumulative net gain in revenue over the last three decades in the event there had been no upward redistribution of income, and imputing a 6.0 percent nominal interest rate, the trust fund would have $1,232 billion more in assets than it does at present.

Just in case it hasn’t hit you yet, “$1,232 billion” is $1.2 trillion.  As Chico Marx said, “Now you’re talking real money.” Just on lost interest alone, the Trust Fund is short $1.2 trillion. Baker concludes that if the Social Security tax continued to cover 90% of income through the 75 years of the shortfall projection, the Trust Fund shortfall would be less by 43%.

[I]f there had been no upward redistribution of wage income from 1983 to the present and the tax was projected to continue to cover 90 percent of wage income over the program’s 75-year planning horizon, the shortfall would be 43.5 percent less than what is currently projected.

As I’ve said before, 75 years is forever in fiscal-planning years — 2088 in fact. A lot could happen between now and then. Who knows, the climate could even change, catastrophically, making all other issue moot.

Now if we talk about raising the salary cap to tax 100% of income starting … how about, right now? … I think this shortfall thing solves itself completely. Don’t you think? [Update: That's a link to the Begich bill, before the Senate now.]

Of course, we’d have to stop the looting to make the good thing happen. And that means being bold enough to notice who the looters are … and who works for them.

Just saying …

GP

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Gaius Publius is a professional writer living on the West Coast of the United States. Click here for more. Follow him on Twitter @Gaius_Publius and Facebook.

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  • http://www.rebeccamorn.com/mind BeccaM

    And let’s not forget Mitt Romney and his magically inflating off-shore IRA accounts.

    Normally, people are only allowed to contribute a few thousand bucks a year to them. Mittens Rmnoney had his buddies load his special IRAs with stocks deliberately undervalued to the effect of mere fractions of pennies on the dollar. A couple days later, voila — it turns into millions.

    In a fair and sane world, what he did would be considered tax evasion, with immediate taxes and penalties due on the fair market value of the assets deposited into that IRA.

  • pappyvet

    A report from Citizens for Tax Justice pretty much sums it all up.
    Of the 280 fortune 500 companies in their report,78 paid ZERO or less in at least one year between 2008 and 2011.In the years they paid no income tax, these companies took in $156 billion before taxes. But instead of paying $55 billion in income taxes as the 35 percent corporate tax rate requires, these companies generated so many excess tax breaks that they reported negative taxes (often receiving tax rebate checks from the U.S. Treasury), totaling $21.8 billion. These companies’ “negative tax rates” mean that they made more after taxes than before taxes. Thirty of the 280 paid no federal taxes at all between 2008 and 2011. Try that one at home.

  • perljammer

    Hey, remove the cap. Want to collect FICA taxes on capital gains, stock dividends and other “non-wage” income? Go for it. I’m all for any reasonable measure that will strengthen Social Security. Not sure I’m crazy about imposing FICA taxes on savings account interest, but whatever. But please — the idea that historically, 90% of wage income has been subject to FICA taxation, is utter crap. That coverage has been achieved in 4 years over the 75-year history –1937, 1938, 1983, and 1984. It hit its all time low at 72% in 1965. The historical average (1937 – 2009) is 83%. So a decline to 82.5% in the next decade doesn’t exactly qualify as a dramatic plunge.

    With regard to the subject of interest on SS deposits, whether lost or not, here’s some food for thought. Social Security contributions are invested in Federal securities (think Treasury Bonds). Interest on those securities is paid by the Federal government out of the general fund. The general fund gets its money from taxation and borrowing. Think about that the next time you want to say that Social Security has no impact on the deficit.

  • nicho

    And I’m not too sure the mistress or call boy is a necessary and proper business expense.

    Well, it does stop them from trying to rape the help.

  • caphillprof

    Well for starters income should be treated as income no matter how it is earned. Everything received by the CEO, including the car, driver, private gym, jet, getaway in Biarritz, everything should be included in income and similarly at all levels down the line AND there should be one tax rate structure for all income–no capita gains, no oil depletion allowance, no excuses.

    And I’m not too sure the mistress or call boy is a necessary and proper business expense.

  • nicho

    Just what I’ve been saying to anyone who will listen and a few who won’t.

    Another huge, huge problem is that the one percenters have found a way to take their salary without it being considered salary. They’ve devised all sort of tricks to hide income behind names like “deferred” this and “deferred” that.

    Good example is Meg Whitman at HP. Everyone made a big deal about how she was taking only $1 a year in salary. However, she was given $16 million in stock options. Her defenders say that she will only get those if she is successful and the stock goes up by 2014. The quick and easy way for CEOs to bump stock prices is to slash the workforce. And Meg has already announced plans to lay off tens of thousands of HP workers next year. That means the stock will go up — Wall Street loves layoffs — and Meg can cash in her chips.

    She will pay no payroll taxes on that windfall — in fact, it will be taxed as capital gains — at 15%. So, she’s found a way to screw the Social Security system entirely.

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