While media pundits raise faux concern every time the Social Security trustees release their annual report, falsely declaring the program is in dire trouble—even though the future modest funding shortfall can easily be fixed by scrapping the cap—it’s important we take a look at a major factor in Social Security’s finances: rich people.
We’ve all heard the stats and we know the rich are getting richer. The working and middle class are more productive than ever, yet are getting a smaller and smaller slice of the pie. This is known as an upward distribution of income. Co-director of Center for Economic and Policy Research (CEPR) Dean Baker wrote last week that the unprecedented upward distribution of income to the already rich over the past three decades has caused a conundrum for Social Security’s finances.
Many people don’t realize that Social Security taxes are capped. This year, workers only pay the Social Security FICA tax, up to $113,700 of what they make. Meaning, millionaires and billionaires are only paying a tiny portion of their income to Social Security taxes. In 1983, the Greenspan Commission made changes to address an immediate Social Security solvency problem. One of these changes included the FICA tax cap that would cover 90 percent of income. But, because the wealthy are making bank, that cap only covers about 83.2 percent of what the wealthiest people are making.
The share going over the wage cap is projected to rise further, reaching 17.5 percent of wage income in a decade. In this way, the upward redistribution of income directly worsens the finances of the program.
Baker also points out that if workers’ wages had increased with productivity, they’d be making 25 percent more today.