Photograph Source: j4p4n – Public Domain
There is now a bipartisan consensus that Social Security faces a serious crisis, and something has to be done. That “something” almost always involves a large cut in benefits.
There is some truth to this story. On its current path, the Social Security Trust Fund will only be able to pay a bit less than 79 percent of scheduled benefits by 2033. The standard story puts the problem as too many baby boomers being supported by too few workers. As I pointed out last month, this seriously misrepresents the issue.
The problem of Social Security is one of income distribution, not demographics. The upward redistribution of income over the last half-century has hugely worsened the program’s finances.
There are three ways upward redistribution hurts the program:
1) A smaller share of wages is subject to the payroll tax;
2) Benefits are higher relative to wages;
3) It is difficult to ask workers to pay more to support the program when their wages are not rising.
More Wage Income Is Going Over the Tax Cap
In 1982, the last time the program was restructured in a major way, only 10% of wage income went over the cap on taxable wages, currently $184,500. Now, because so much income goes to high-end wage earners, such as CEOs, Wall Street types, and highly paid doctors and lawyers, 18 percent of wage income escapes taxation. If there had not been this massive upward redistribution, the current income of the program would be almost 10% higher, and the trust fund would be able to support full benefits much further into the future.
Wage Income Has Not Kept Pace with Productivity
In the 1980s and 1990s, inequality was primarily the result of income going from ordinary workers like retail clerks and assembly line workers to highly paid workers. Since the turn of the century, inequality has been primarily a story of more income going from labor to capital.
This affects Social Security because benefits are only indexed to inflation. If wages rise faster than inflation, then taxes, which rise in step with wages, rise relative to benefits.
To get an idea of the size of this impact, suppose the average beneficiary has collected benefits for 15 years. If wage growth was 1.0 percentage point faster over this period, then Social Security’s revenue would be 15 percent higher, while benefits would be the same. In this story, the higher revenue would be almost enough to close the projected shortfall, in addition to the trust fund being considerably larger today.
Workers Are Willing to Pay More for Their Retirement If Wages Are Rising
From 1960 to 1990, the Social Security tax rate rose from 6.0 percent to 12.4 percent, a 6.4 percentage point increase. The tax rate has not increased at all in the last 36 years. There was no massive revolt against the Social Security tax increases in the prior thirty-year period, both because people valued Social Security and, at least through the first part of this period, wages were rising rapidly.
If wages had kept pace with productivity growth, they would be more than 60 percent higher than they are today. In that scenario, it seems plausible that workers would be willing to pay 1-2 percentage points more in taxes for Social Security.
The Elites Broke Their Bargain on Wages: Don’t Let Them Steal Our Social Security
Social Security was set up as a program that would be supported by a tax on wages. Workers were collectively paying for their own retirement. This was totally feasible in a context where ordinary workers got their share of productivity growth.
It becomes less feasible in a context where wages are nearly stagnant, and most of the gains from productivity growth go to highly paid workers and capital, as has been the case for the last half-century. In that context, cutting Social Security benefits is just rubbing our noses in it.
We easily can afford to pay full benefits. The projected shortfall in 2033 is roughly 1.5 percent of GDP. That’s less than the increase in military spending that President Trump is requesting for 2027 compared with the last Biden budget in 2025.
In fact, as an economic matter, we are already paying most of this shortfall. When the government repays the bonds owned by the trust fund, it has exactly the same impact on the economy as if it was just paying the benefits directly, without the bonds held by the trust fund. The bonds are a promise, but they are not real economic resources. They don’t make it easier to pay benefits than would otherwise be the case.
Upward Redistribution Was Done to Us: It Didn’t Just Happen
The elites like to pretend that all the money going to Elon Musk, Mark Zuckerberg and the rest of the billionaire clique was just a happy coincidence. It’s a story of “look what the markets have done.”
That is 100 percent crap. The system was rigged to give this crew all of our money. The most obvious way the rich redistributed money to themselves was with government-granted patent and copyright monopolies. In the case of pharmaceuticals alone, this raises the cost by close to $600 billion a year or $4,500 per household. The money goes to the drug companies and their shareholders.
Larry Ellison and Bill Gates are among the richest people in the world because of the patents and copyrights the government gave them on the software produced by Oracle and Microsoft.
Patents and copyright monopolies come from the government, not the market. There are other mechanisms for financing innovation and creative work. In any case, we could have made these monopolies shorter and weaker, instead of longer and stronger as we did, which would have meant less money going to the rich and very rich.
The financial system is incredibly bloated by conscious choice. We could downsize it hugely by applying the same sort of sales tax on financial transactions that states impose on sales of shoes and clothes. That would mean many fewer fortunes there. We also don’t have to bail out banks when they put themselves into bankruptcy, as they did in the financial crisis and more recently when the crypto boys put the Silicon Valley Bank over the edge.
We also have written and enforced labor laws to the detriment of unions and workers. Most obviously, most states ban 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. Also, unions are prohibited from supporting strikes as a union. This means that the steelworkers cannot refuse to produce steel for an auto company that is facing a strike by its workers.
These and other policies were designed to redistribute income upward. They have had their intended effect of taking money from the rest of us and giving it to the 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.
Polling consistently shows that Social Security enjoys solid support across the political spectrum. (See “Support and Strengthen Social Security” in CEPR’s Majority Agenda.) The only way the elite will get their cuts to Social Security is if they get us to buy their lies. Towards this end, they will produce “bipartisan” plans where they find Democrats who will go along and legitimate the lies.
The basic point is incredibly simple. As a society, we have plenty of money to pay for Social Security. The rich have just taken so much from workers that it is difficult for them to pay the full tab out of their wages. The answer is to take back some of the money we have given the rich over the last half-century.
This first appeared on Dean Baker’s Beat the Press blog.
