As the outsized Baby Boom generation claims Social Security benefits, Americans increasingly doubt whether the program can pay all that it has promised — or even continue to cut checks at all. Social Security’s Trustees warn that unless Congress acts to restore the program’s long-term solvency, by 2034 it will only have funds to pay 77 cents of each dollar. An adjustment this size in 2018 would drop the average annual Social Security payout of $16,848 to $12,973. Most older Americans depend on Social Security for all or a majority of their income.
The longer Congress plays chicken on this issue, the greater the risk that changes such as tax increases or benefit cuts, or a combination, will have major economic impacts on retirees and workers. Program actuaries emphasize the growing ratio of retirees receiving benefits to workers contributing payroll taxes as a major force impinging on the program’s solvency. But other forces are at work. Growing wealth and income inequality have significantly eroded Social Security’s tax base.
Wealth concentration: As Americans at the top of the economic spectrum continue to amass equities, bonds, and other assets, the portion of national income from capital investment has increased significantly. In the United States, labor’s share of earnings fell about eight percentage points between 1995 and 2013. Since Social Security relies primarily on a tax on labor for its sustenance, the relative growth of capital income gradually is choking off a source of revenue.
Income inequality: As part of its structure to promote fairness between economic classes, Social Security replaces relatively more lifetime income for lower-wage workers than those with higher wages, but also caps wages subject to its payroll tax, in part to increase its net value in the eyes of higher earners. The wage cap for 2018 is $128,400. Over the years, wages of lower-income Americans have stagnated while those at the top have grown, resulting in a six percentage point drop in the portion of wage income taxed by Social Security (from 88.6 percent in 1984 to about 82.5 percent going forward).
The trustees urge policymakers to restore Social Security’s financial stability as soon as possible and offer a long list of policy options. Those that have gained attention include reducing benefits; increasing the earnings ceiling and/or raising the payroll tax rate; upping the retirement age; and trimming the inflation protection.
There are many ways to balance the books. Congress could restore Social Security’s tax base by re-establishing and expanding funding provided by wealthy people benefiting from decades of growing wealth and income disparities. The two policy options below could restore most, if not all, of the program’s financial health. Taxpayers at the top of the heap would bear most of the burden, but none would end up driving a smaller car or living in a smaller house as a result:
- Taxing invested capital: Beginning in 2019, Congress could apply an additional 6.2 percent tax on investment income (which mostly accrues to the wealthiest), gradually extending it from top earners to the middle class. Responding to a request from Rep. Peter DeFazio, D-Ore., and Sen. Bernie Sanders, I-Vt., SSA actuaries estimate this policy would close about one third of Social Security’s long-run shortfall.
- Taxing high-earner income: Beginning in 2019, Congress could apply the payroll tax to earnings above $400,000, leaving a “donut hole” that would gradually disappear as the current indexed tax cap rises, and provide some benefit credit for newly taxed earnings. This change could close up to two thirds of the program’s long-range shortfall.
It should be noted that Congress added extra Medicare taxes for high earners on both income and capital gains as part of the Affordable Care Act, thereby providing possible precedent to do the same for Social Security.
No one knows when serious negotiations over Social Security’s future will begin. The longer Congress waits, the more difficult and painful the task. Americans need to know that Social Security’s solvency can be restored — with no benefit cuts — by reclaiming and expanding contributions from high-income Americans. This position should be on the bargaining table in spite of cries of class unfairness and “soaking the rich.”
We no longer need to be afraid of this political boogie man. After all, didn’t Congress just soak the majority of Americans with a tax bill that mostly enriches those at the top while driving up the national debt we all must repay? Wealth and income gaps have widened to the point where political orthodoxy and tiptoeing should no longer confine our options.
Karl Polzer is founder of the Center on Capital & Social Equity.
