I almost agree with the editors of the Washington Post. In a recent editorial they say this in response to a proposal that FICA max be increased:
Even after all that pain, removing the cap would only close about half of Social Security’s funding shortfall. That’s because the fundamental problem with the program is not that it doesn’t tax enough. The problem is that its structure is based on demographic assumptions that no longer hold.
That’s almost correct. If they restated it “The problem is that its structure is based on demographic and income assumptions that no longer hold” I would agree completely. Notice the emphasis. Social Security was designed around two assumptions: the ratio of workers to retirees and the distribution of wages. The first has changed because Americans live longer and have fewer children. The second has changed because an increasing share of national income now goes to people earning above the FICA wage base.
The change is easy to see. Since 1980, incomes for the top 1 percent have grown at a dramatically faster rate than those of everyone else.
Note that the graph has two scales, one for incomes of the top 1% of income earners and the other for the bottom 99%. If the bottom 99% were shown on the same scale as the top 1%, the line for them would read as flat whereas it actually increased. Since earnings above the FICA wage base are exempt from the payroll tax, shifting more national income into those earnings automatically reduces the share of total wages subject to Social Security taxation.
I’m open to other suggestions for reforming Social Security than increasing FICA max. I know of several:
- Just abolish it.
- Supplement it with private accounts. Let individuals buy stocks or other investments. This was proposed during the Bush II Administration.
- Supplement it with national accounts. Let the Social Security Administration buys stocks or other investments.
but let’s not pretend that each of those wouldn’t have adverse side effects as well. If you’d prefer one of those alternatives, explain how you’d mitigate the problems it would create.
#1 and #2 assume that we’d be satisfied if some retirees became destitute in their old age. Nearly 40% of Americans rely solely on Social Security Retirement Income. The problem with #2 is that it shifts investment risk to individuals. Some retirees would inevitably reach retirement with inadequate savings.
The problem with #3 is that over time the federal government would come to own an increasing percentage of the U. S. economy. My experience has been that most proposing #3 are strongly opposed to that.
Just a comment on your chart. The scales are different so it doesnt really show the difference in growth like it should. If you look at the raw numbers, the 99% show growth from 35k to 60k, less than twice. The 1% shows growth from 500k to about 2000k, about 4 times. Anyway, the top 1% own the media and the government. Dont expect any change resulting in them paying more tax.
Steve
My first version showed the two lines on the same scale. The change for the 99% was materially zero over the period.
Did that one go back to 1970 or so? IIRC, which is suspect without my double checking, I think that if you go back past 1980 into the 60s-70s there actually is almost zero gain for the lower income groups. Might be the lower 90% and not the 99%.
Steve
I think the period 1990 to present might be a better snapshot. And numbers seem to vary by source, although not enough to change the overall issue. I have always used the SSA website.
In any event, since 1990 SS income has risen by 4.5x, and the reserves by almost 10x. Its more recently (the past 8ish yrs) that the reserves started declining, whereas the income divergence and its FICA cap have been at work since 1990. I’m not arguing that the income cap isn’t a factor. Simple arithmetic says so. But I think the dominating factor is baby boom retirement, perhaps exacerbated by the Covid retirement issue. It was known and should have been planned for. In my business we would get sued. But…..its government.
That all said, the system will not be abolished based on humanitarian and political survival considerations. The biggest bait and switch in history would not bode well for future transfer payment schemes, the lifeblood of politicians.
Number two is a personal responsibility issue. Factors include expenditures on vacations, big houses, cars, fancy TV’s beer………..as opposed to saving. And the gutting of the manufacturing sector. But just as in #1, as a country we will suffer free riders before we accept destitution.
I think we have a cobbled together solution in our future: 1) higher income caps, 2) higher payroll tax rates, 3) extended retirement ages and perhaps even some benefit truncation, although that could be political poison. People should recall that the system still generates income, and can (projected) fund about 75% of benefits if memory serves. So that gap is your financing problem until the rat gets through the snake in about 15 years.
As the graph that I displayed does, it went back to 1980. Most of the changes that have created our present situation go back to roughly that time.
Have it your way. Still, the same issues pertain.
I think we will cobble together a number of things. The system stinks. It always has. But it was conceived at a time when there was statesmanship and a real problem. It has served its purpose marginally, as any government program. It will be interesting to see where it goes. But I think just getting the rat through the snake will dictate.