Raise the Cap and Close the Gap

Dean Baker:

The Primary Cause of Social Security’s Bleak Outlook Is Upward Redistribution, by Dean Baker: In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:

“Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement.”

Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.

The main reason that the program’s finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.

In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

Raising the cap is my favored solution, but (surprise) somehow raising taxes of those with the most political power is not on the agenda. Instead, the proposed solutions always seem to hit those who are the most politically and economically vulnerable.

Peter Dorman also weighs in:

For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character.  These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular.  Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of “saving” it.  So what’s the strategy of the anti-SS minions?

Cynicism.  Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it.  From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement.  (Not that this has provoked a big Feldsteinesque spike in their personal savings….)  As this mindset takes hold, it becomes easier to simply tune out the debate over SS.  After all, it’s not like it’s actually going to be there when I’m old, no matter what they say, right?  At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.

What I’d like to see are news stories that say something like, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”

People also need to realize that “Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets. It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now.”

Notice that even under the worse case scenario, real benefits would be higher than they are now. The benefits would not keep up with increases in productivity as they do presently — payments rise as the standard of living rises — but the benefits would still rise as much or more than inflation. So today’s standard of living would still be available even in the worst possible case. But there is the problem of how to cover the productivity increases over the next quarter century. What to do?

Raise the cap and close the gap.

This post originally appeared at Economist’s View and is posted with permission.

3 Responses to "Raise the Cap and Close the Gap"

  1. George N. Wells   April 25, 2012 at 5:11 am

    What nobody wants to deal with is that Social Security helps younger citizens in that their parents are not, as a result of age or disability, thrown into poverty and they becoming the total responsibility of their children. While many self-identified conservatives yearn for the days before OASDI they do not have a memory of the costs that landed in the laps of the children when their parents got aged. Their ability to have dual incomes, vacations, put their children through college, and save for their future were are deferred to care for elderly parents without any support.

    By all means: “Raise the cap” and tell the younger generation that this program is giving them an opportunity to plan for their own future.

  2. benleet   April 25, 2012 at 7:28 pm

    Look at the Social Security figures for wage income for 2010 — http://www.ssa.gov/cgi-bin/netcomp.cgi?year=2010
    It shows that 28% of all wage income went to wage earners making more than $110,000 a year. Income above $110,000 was not taxed, and that was 18% of all income, not the 10% of 1983 when the law was made. This group with over $110,000 in wage earnings amounts to 5% of all wage earners. Remember also that wage income is about 2/3rds of all income, and business and capital gains income is not taxed for SS. Then ask, what is the purpose of Social Security? It's a mandatory retirement savings plan for low income workers, and $14,000 a year is the normal payout per worker. And nearly half would be in poverty without their SS monthly payments. About 35% of all the personal income in the U.S. does not pay SS tax — that includes the 18% above the $110,000 threshold plus the 17% that goes to capital income and business income. Note also that we are at a 60 year low in portion of GDP taxed by the federal government. Is this a problem that has a reasonable and fair solution that is being blocked by the wealthiest among us who refuse to pay higher taxes? My blog, http://benL8.blogspot.com

  3. LCR   April 25, 2012 at 9:42 pm

    I remain incredulous to the fact that saving one's own money "responsibly" and not being sucked into the vortex of "consumerism" is frowned upon. Why MUST one "patriotically" consume? Oh yea, America does not produce "goods", it produces disposable worthless crap that needs constant "replenishing" and productivity gains are falling. Screw it, I'm going to keep saving. Since the Fed can print to infinity, Social Security will continue to pay out, even when a dozen eggs costs 10,000 renmimbi