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Oct 2, 2023

Rising Income Inequality And Social Security

       From Marketwatch:

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. …

5 comments:

  1. Pretty much, the bottom line is that SSA works by having the poorest funding the poorest. The way it's set up now, with rich capping out of paying into Social Security, makes it a regressive tax. The obvious solution is let the rich continue to pay until much higher limits. I understand the rich will claim that they shouldn't pay more because the won't get more, but the solution is to continue the upward pay spiral of diminishing returns that now exists. As one contributes to SSA the incremental increase in benefits per additional dollar contributed shrinks, due to the way the system is set up to give more bang per earlier dollar paid into the system. Just continue the system upward and give the rich a little bit more benefits (on a diminishing return basis) for additional dollars paid in. The rich will still get something for their additional money, but the larger percentage of their contribution will go towards lower earning people's benefits. This can help fund social security endlessly

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  2. Yeah, but this is actually a good thing, because the uber-wealthy now have more money to spend on “philanthropic” work, like maintaining their children’s rich private schools’ golf courses, riding trails and lacrosse fields.

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  3. So we know the reason why, but we will choose not to fix it.

    After working for the agency for almost 20 years, this is right in line with how the government operates as a whole. Let’s identify the problem and then implement a bunch of changes that won’t really address that issue. Then we’ll pretend like we don’t know why the problem still exists because we’ve done x, y and z.

    The folks running this country and imbeciles…on both sides.

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  4. No surprise. Plus Bug Capital's push to moving as many people into the gig economy as possibly probably also artificially depresses payroll tax.

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  5. One of the proposed fixes for Social Security is to raise the taxable cap to an amount that each year would apply to 90% of income subject to FICA. It's a fix that is often goes unmentioned.

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