Upward Distribution of Wage Income Behind Social Security’s Shortfall
CEPR’s Dean Baker says Republicans often omit the role of stagnant wage growth in the discussion around the growing deficit in this social insurance program
KIM BROWN: Welcome to The Real News Network in Baltimore. I’m Kim Brown.
So, if you’re a millionaire, February 16th is the last day that you will pay into the social security for the entire year. That’s because the federal payroll tax cap is set at $127,000. So, any money made beyond this point, is not subject to taxation that would fund this very crucial federal social program.
And to discuss this further, we’re joined with Dean Baker. Dean is the Co-director of the Center for the Economy and Policy Research. He is also the author of several books. His latest is titled, “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” Dean, we appreciate you being here.
DEAN BAKER: Thanks for having me on.
KIM BROWN: So, Dean, Republicans like House Speaker, Paul Ryan, say that our society is aging, and the number of retired people are going to put too much pressure on the social security program, and eventually exhaust the funds available to pay out to beneficiaries.
So, what do you make of this argument, and the reforms that he has put forth to address the increasing pressures on social security?
DEAN BAKER: Well, there are a few points to be made on this. They love to talk about the issue of aging, and it’s kind of, you know, strange however you want to put it. The point about aging is, it is true, we are getting older, that’s actually a good thing, in the sense that people are living longer. Most of us think that’s a good thing because as medical care and our wellbeing improve, people do live longer lives.
But what’s weird is that this isn’t new. This has always been true. It’s not unexpected. People knew that we were going to live longer. You can go back our projections that were made back in the ’30s; they are almost exactly on line, in terms of how much longer people would live, and the increase in the size of the retired population, relative to the working population.
So, none of that is new. We knew about it, it’s not a new story. There’s nothing qualitatively different from what’s projected to happen in the next 10, 20, 30 years, than what’s happened in the last 30, 40 years. So, that’s not new. What is new, and Speaker Ryan is less anxious to talk about this, is that we’ve had a large upwardly distribution in wage income. And the reason why that matters, you referred to the cap on wage income — $127,000. Income above the cap is not subject to taxation.
The last time there was a major overhaul of the program in 1983, they set the cap at a level where only 10% of wage income went over the top, avoided taxation. Today, because there’s been so much upwardly distribution of income, close to 20%, almost twice as large a share of wage income goes over the top, and avoids taxation. That’s a big part of the projected shortfall in social security. I’m not saying it’s the whole story, but it’s a very big part of the story. And it’s a part of the story that Speaker Ryan and other Republicans aren’t anxious to talk about.
So, one way, of course you could address that, well, I’d like to see us reverse the upwardly distribution. That was largely what my book was about. But the other thing you could do is simply raise the cap. That would go much of the way towards eliminating the shortfall. The other part of the story, the way we had dealt with aging in the past, was we did increase the social security tax. It was about 3% back to 1960, 3% on both the worker and the employer. Today it’s 6.2%. It reached that level in 1990.
If wages are rising, you could raise the social security tax. No one ever wants to see their taxes increase, but you know, you could do that in a context where wages are rising, and it’s not a big deal. If your wages over the course of a decade go up 15 or 20%, as was true, say in the ’60s. And in the course of that decade, you raise the social security tax by one percentage point, that doesn’t seem like such an awful thing.
Now, if your wages aren’t rising, of course, having the social security tax go up is pretty bad. But the key point here is, we need a situation where again, workers are seeing their share of gains, of economic gains and productivity gains, in wage growth, and it’s not all going to those at the top. And that’s the part of the story that Speaker Ryan doesn’t like to talk about.
KIM BROWN: So, Dean, why is there a payroll tax cap? I mean, in other words, so why do millionaires and billionaires not have to pay their equal share, like most working class folks?
DEAN BAKER: Well, the logic is, that the benefit is related to your earnings, your taxable earnings, and the benefit is also capped. So, if you raise the tax, then presumably you’d raise the benefit, which to my view is fine. But when you get to very high tax levels, or I should say very high wage levels, you would be talking about very high benefits. And you know, as a practical matter, Bill Gates probably doesn’t need social security that much.
So, you know, the idea is to give people their… you know, some share of their working income during their retirement years. And that matters more for workers in the middle, maybe upper middle. It doesn’t make a lot of sense for those at the very high end. And also, as a very practical matter, when you talk about taxing very high earners, say someone earning 2, 3, $4 million, these people have a lot of opportunity to game the system, because it does only apply to wages.
This is taxing wage income, because social security replaces your wages in retirement, and if you’re say, someone earning 2, 3, $4 million, odds are you’re a CEO or a high level executive, or maybe you’re a doctor that has their own practice. It’s very easy for you to manipulate your income so it doesn’t show up as wage income.
So, in that case, we wouldn’t get the money anyhow. So, one can argue where the cap should be, and I would certainly say it should be higher than where it currently is. I’d like to get us back to covering 90% of wage income, as we were in the early ’80’s, but I don’t think it makes sense to say eliminate the cap altogether. We wouldn’t get that money.
KIM BROWN: So, talk to us about the types of reforms that are likely to be passed under this Republican-controlled Congress, and be signed into law by Republican President, Donald Trump. Because, this seems to be like the perfect storm, for Conservatives to push through reforms to social programs, because it seems like they kind of have a rubber stamp in the White House.
DEAN BAKER: Well, I’m going to be a little bit more optimistic here. I don’t think any are likely to be passed. I could talk about a lot of things that they will propose, and my hope is that they will be beaten back, as they have been in the past. But just to mention some of the things that are almost certain to come up on the agenda, many Republicans, including Speaker Ryan, have talked about raising the retirement age.
So, currently you have to work until 66 to get full benefits. That’s already in law, scheduled to rise to 67 over the next six years. So, that already is in law. So, if they do nothing, that’s exactly what happens. But many Republicans have wanted to raise that further, facing an end to say, 70 being the age at which you would get full benefits. So, that’s something almost sure to come up. Also, cutting back the annual cost of living adjustment, this is something many people have talked about. Unfortunately, President Obama had gone out on a limb and suggested it as well.
So, they can change the indexation formula using a different index, they would effectively reduce the annual adjustment by 3/10’s of a percentage point. Now, that doesn’t sound to anyone like much money, the issue is though, that’s 3/10’s of a percentage point a year, after you retire. So, if someone collects benefits for 20 years, that’s a 6% reduction in the benefit they’re getting by the end of that period.
So, someone who starts collecting benefits, say at age 65, and they die at 85, by the time they’re 85, they’ll be getting 6% less. If they’re fortunate enough to live to 95, they’d be getting 9% less. That ends up being a substantial cut, and unfortunately it hits those hardest who need it most, because it’s the oldest elderly who have the least amount of money.
There are also proposals for changing the formulas, so they often talk about this as giving the wealthy less, but it’s not wealthy, as we ordinarily think of. These aren’t millionaires; they’d be talking about giving lower payments to, say people earning say $60,000 a year. That’s earning during their working years, obviously getting less in retirement. So, there are proposals that would reduce the benefits for higher earning workers, but certainly not anyone we would think of as high-income earners.
So, those are three areas that have regularly been talked about by Republicans, and it’s virtually certain we’ll see proposals along these lines. Again, I will be somewhat optimistic. We managed to beat these back in the past, and even given the Republicans control both Houses of Congress, they have President Trump in the White House, I think it’s still possible it could be beaten back. I should also point out, for whatever it’s worth, during his campaign Trump repeatedly made a point of saying he is opposed to cutting social security.
Again, we know commitments from Donald Trump in this area are not worth very much, but that is what he said. So, it is worth pointing out, he would have to go back on an explicit campaign commitment, if he were to support cuts to social security.
KIM BROWN: So, Dean, I guess the bottom line question that gets asked all the time, is that, is social security sustainable? Is this the program that will continue to pay out money to beneficiaries, going forward in the future? Will millennials and Gen Xers get to collect on social security?
DEAN BAKER: Well, two points to be made on this. Worst-case scenario, we sit on our hands, we never do a thing. So, we can pay full benefits for the next, about 17 years, 2034 we’re no longer able to pay full benefits. But even if we never did anything — and frankly that’s impossible to imagine — but let’s for the moment say we never did anything, it could still pay about ¾ of scheduled benefits, basically forever.
So, in that story, millennials will still get plenty. They’d get a larger check than I would, because benefits are projected to rise through time. So, even if we’re only paying ¾ of benefits, millennials would get larger benefits in their retirement than I would. I don’t envision that happening, because as I said, I would expect Congress would make changes to the program if we actually got to that point.
And there have been a number of polls that show the public is willing to pay higher taxes for social security. And my expectation is that would be true 20 years from now, as well. So, in the event we actually got to a point where you couldn’t pay full benefits, my expectation is most people would tell their members of Congress, “Well, if you have to raise taxes, raise taxes.”
And again, since wages should be higher 20 years from now, people would have higher after-tax wages than they do today, even if we did have a somewhat higher tax rate. And of course, what we can do is raise the cap, and get a lot of the money that way.
KIM BROWN: Indeed. Well, Dean, that is optimistic, because if we expect wages to be higher in 20 years, I’m sure 30 years ago, people also expected now wages would have at least gone up to meet the cost of living and inflation, and we’ve seen in a lot of areas, that has not happened.
So, is it really salient to expect that wages will go up, considering they haven’t gone up in the past 30 years or so?
DEAN BAKER: Well, they have gone up somewhat. Obviously, we would expect that they would have gone up more. You know, this is very much up for grabs, to say that you’re going to expect income to continue to be redistributed upward indefinitely. It’s not impossible, but you know, I don’t consider it overly optimistic to assume that, you know, what I consider an aberration will consider indefinitely.
It’s not impossible, but you know, I think… Let me put it this way, if someone is saying we should cut social security because wages will continue to be redistributed upward forever, I’d say you’re close to nuts. What we should do, is worry about wages being redistributed upward. I mean, it’s a little crazy to say, let’s just assume wages will be distributed upward forever, so we’ve got to cut social security. That’s a very strange view of the world.
KIM BROWN: Indeed. Well, we’ll certainly be revisiting this topic, as I’m sure Congress will be revisiting it as well. So, we appreciate you joining us.
We’ve been speaking with Dean Baker. He’s the Co-director of the Center for Economic and Policy Research. He’s also the author of several books, and you should check out his latest, titled, “Rigged: How Globalization and the Rules of the Modern Economy were Structured to Make the Rich Richer.” Dean, we appreciate you joining us, thank you.
DEAN BAKER: Thanks for having me on.
KIM BROWN: And thanks for watching The Real News Network.