Social Security is a Problem of Income Distribution, not Demographics

The rich took our money, now they want to take our Social Security

The rich almost completely control debate in this country. There is no better proof of this fact than the current debate over the future of Social Security.

This has been conveniently framed as a problem of demographics. You know, too many people living long into retirement and not enough kids entering the workforce. That sounds compelling, as long as we don’t try to think about it too much.

First, we knew this basic story long ago. On the life expectancy side, we’re actually doing somewhat worse (better from the standpoint of the program’s finances) than was expected in 1982, the last time there was a major reform to the program. The projections from that year showed men living on average 16.6 years after they turned 65. We are beating that some in the current projections at 18.2 years. But the story for women looks considerably worse than was projected in 1982, 20.7 years now compared to a projection of 22.6 years in 1982. So, we can’t say the problem is people are living longer than expected.

The fertility rate has fallen behind projections. and that has made the financing of the program worse, but the big story is that wage growth has fallen far behind the pace projected in 1982. The projection in 1982 was that real wages (the gap between wage growth and prices) would grow 1.8% percent annually for the indefinite future. And this wage growth was assumed to be for the workforce as a whole; there was no anticipation that there would be substantial changes in the wage distribution.

Inequality Matters Big Time for the Finances of Social Security

If real wages had grown as projected, they would have increased by more 120% between 1982 and the present. Instead, median wages have risen by just over 30%.

A big part of this story is that productivity growth has been weaker than was projected. But an even larger part is that there has been a huge upward redistribution of income over this period. If wages had kept pace with productivity growth, they would be more than 60% higher than they are today.

This directly matters for Social Security’s finances for two reasons. The first is that a much larger share of wage income has gone over the payroll cap. The cap rises in step with average wages, not the typical worker’s wages. As a larger share of wage income went to those at the top, Wall Street types, CEOs and other top executives, and highly paid professionals, less was subject to the Social Security tax. In 1982. only 10% of wage income avoided taxation. Now it’s close to 18% of wage income.

And since the turn of the century, a larger share of income has been going to corporate profits. This money also escapes taxation for Social Security.

There is also the issue that if wages had been growing more rapidly over the last half-century, tax revenue would be higher relative to benefit payments. Benefit payments after retirement are indexed to prices. If wages outpace prices, tax revenue increases relative to benefits. The Trustees calculate that a 0.1 percentage point increase in the annual rate of real wage growth is equivalent to a 0.2 percentage point increase in the tax rate.

If real wages had grown by roughly 1.0 percentage point faster over the last half-century, and were projected to continue to grow at that pace, it would eliminate most of the projected shortfall in the trust fund.

The Indirect Effect of Growing Wage Inequality

This direct effect of growing inequality accounts for far more than half of the gap in Social Security’s finances, but there is also a very important indirect effect. In 1960, the Social Security tax rate was 6.0%, combining the employer and employee side contributions. By 1990, the tax rate had risen to 12.4%, an increase of 6.4 percentage points over 30 years. In the last 35 years, the tax rate has not increased at all.

In the context of weak real wage growth and a massive upward redistribution of income, it is understandable that there would be enormous resistance to any further tax increases to support Social Security. But suppose real wage growth had kept pace with productivity over the last half-century, and we had not seen the massive upward redistribution to Elon Musk, Mark Zuckerberg, and the rest.

I’m an economist, not a political consultant, but my guess is that if real wages were more than 60 percent higher, most workers would be okay with a 1-2 percentage point increase in the tax rate to secure Social Security for themselves and their children. This was the case for workers in the decades from 1960 to 1990, who put up with much larger tax increases.

They DID Upward Redistribution; It Didn’t Just Happen

The other part of this story that is essential for everyone to understand is that the upward redistribution was brought about by government policy; it did not just happen. The most obvious way this happened was through government-granted patent and copyright monopolies. These government-granted monopolies make folks like Larry Ellison and Bill Gates incredibly rich. They also make prescription drugs and medical equipment very expensive, when they would be cheap in a free market.

The government has protected the financial industry with bailouts, tax policy, and bankruptcy laws that allow private equity barons and Wall Street tycoons to become rich at the expense of the rest of us. If we drafted the laws to promote efficiency, we would have a much smaller financial sector and fewer and poorer billionaires.

We also have written and enforced labor laws to the detriment of unions and workers. Most obviously by banning contracts that require all workers who are represented by a union to pay for that representation. While these contracts are not enforceable in most states, contracts that prevent workers from working for a competitor are enforceable.

These and other policies that were designed to redistribute income upward have had their intended effect of taking money from the rest of us and giving it to the rich and very rich. And now that their upward redistribution has had the effect of undermining the financing of the country’s most important social program, they want to cut Social Security. It’s essential that people stand up to the lies; the problem is the rich taking too much of our money, not overly generous Social Security benefits.