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Jan 30, 2011

Social Security Affected By Weak Wage Growth And Rising Earnings Inequality

From a very thorough Briefing Paper released by the Economic Policy Institute:
The conventional wisdom is that the projected gap [in Social Security funding] is driven largely by rising life expectancy, and that the key to restoring solvency is raising the normal retirement age, the age when participants are eligible for full retirement benefits. ...

However, gains in life expectancy represent only a small part of the fiscal challenge facing Social Security. The increase in the normal retirement age from 65 to 67, currently underway, already offsets gains in life expectancy for workers born before 1960, and longevity gains for younger generations account for only a fifth of the projected Social Security shortfall. ...

The bigger problems are weak wage growth and rising earnings inequality, which account for more than half the projected shortfall that has emerged since the system was last restored to long-term balance in 1983. Earnings inequality has eroded Social Security’s taxable earnings because earnings above a cap are exempt from Social Security taxes. Likewise, slower wage growth increases the costs as a share of taxable earnings. Rising health care costs, which create a growing wedge between compensation and taxable wages, a falling birth rate, and higher disability take-up are also contributing to the projected shortfall.

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