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When Alan Greenspan and his committee supposedly “fixed” Social Security’s funding crisis in the early 1980s, the program was supposed to remain solvent well into the 2050s.
Instead, the trust fund is scheduled to run out of money in 2034 — decades ahead of schedule. What went wrong?
Stephen Goss, who has been the Social Security Administration’s chief actuary for more than 20 years, posed this question recently during a retirement conference hosted by the Harkin Institute. And his answer may surprise some people.
Sure, birthrates have collapsed from the heady days of the baby boom, he said, and that trend hasn’t helped. But it’s nothing new: The big fall started in 1965, nearly 20 years before the Greenspan Commission.
And yes, people are living longer than they used to. But that isn’t a surprise, he added —actually, the decline in mortality is pretty much in line with expectations. The forecasts have proven “remarkably accurate,” he said.
So what changed? In a word: inequality.
Goss argued that rising income inequality — with fast growth at the top and slow growth everywhere else — is the mystery ingredient that has thrown Social Security’s finances into turmoil earlier than planned. And the big change took place in the 17 years after the Greenspan Commission made its projection, from 1983 to 2000, he said.
During that time, incomes for the best-paid 6% of earners rose by 62% in real, inflation-adjusted terms, he said. For the other 94%, incomes rose by just 17%.
The net result was that the lion’s share of U.S. income growth was above the Social Security cap, and wasn’t subject to the program’s payroll taxes. The percentage of incomes subject to the program’s tax collapsed from around 90% in the early 1980s to barely 82% by the turn of the millennium.
“This is a massive change in the distribution of earnings, and that’s what caused us to have a much smaller share of all covered earnings falling below our taxable maximum,” Goss said. “This is a major component of the shortfall we’ve had.”
Interestingly, Goss said the change took place in the 1980s and 1990s. Since then, the picture has remained roughly stable: Last year, according to the most recent Social Security Trustees annual report, about 82% of earnings were subject to the program’s 12.4% payroll tax.
To some extent, of course, this relies on the assumption that the rising incomes at the top came at the expense of those earning less. If top incomes had risen by just 17% from 1983 to 2000, like those for everyone else, Social Security’s payroll-tax income would have been no higher.
But in a clarification emailed to MarketWatch, Goss’ office pointed out that the overall rise in average wages, including those at the top of the distribution, drove up benefits. “Overall the average wage [ie., the Average Wage Index used to calculate benefits] rose as fast or faster than expected, meaning that average benefit levels generally increased about as expected,” they wrote. “But with an increased share of covered earnings shifting above the taxable maximum, total tax receipts were less than expected. This permanent shift in the distribution of earnings reduces payroll tax receipts by about 8 percent relative to expectation in 1983.”
Where does this leave us? To balance its books after 2034, Goss said, Social Security will either need to cut benefits by a fourth or raise revenues by a third, or do some combination of the two. Some people want to respond to this rising inequality by raising the maximum amount of earnings subject to the payroll tax — this year, it’s $160,200. Others want to get rid of the cap altogether.
Still, others might point out that if you think top incomes have risen a lot, you should look at top levels of wealth. Since the early 1980s, U.S. household wealth has risen by nearly twice as much as U.S. personal incomes.
It remains intriguing that a professional who makes, say, $2 million a year and pays nearly 50% in city, state and federal tax, should be considered to be somehow scamming the system. Meanwhile, someone who has accumulated a fortune of $2 billion may pay effectively no tax at all, and seemingly nobody cares.
From the archives (July 2021): U.S. wealth grew by $19 trillion during the pandemic—but mostly for the very rich
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