Social Security is falling short because of persistent wage inequality and political inaction; President-elect Biden has comprehensive plans to strengthen Social Security.
The inequality of wage income and taxable wages is the most salient and unexpected reason for the Social Security revenue shortfall predicted in 14 years when Social Security will only be able to pay 76% of promised benefits. As a result, the elder poverty rate, living on less than $1,000 per month, will increase from 4.8 to 9% in 2034.
Because Social Security only taxes income up to an annual cap, which is $142,800 in 2021, when people who earn over that amount do better than everyone else more income escapes the Social Security tax as Christian Weller explains. The Economic Policy Institute calculates wages for the top 1% grew 158% since 1979, while wages for the bottom 90% of earners grew only 24%.
The Congressional Research Service in September 2020 also fingers increasing earnings inequality as the culprit causing the share of earnings taxed for Social Security decreasing from 90% in 1982 to a whopping 84% in 2017.
How did the share drop so far so fast?
When Congress last adjusted the cap in 1977, policymakers set the cap – admittedly it was arbitrary, it happened to be the share taxed at the time — to cover 90 percent of all wages. The cap was indexed to average wage growth because policy makers figured earners at all levels would get about the same increase in wages. In his signing statement on the 1977 amendments, President Carter emphasized that beyond their importance in terms of increasing program revenue, the tax max changes were also significant because they achieved this goal in a manner that fostered equity. He suggested that addressing the shortfall primarily through increasing the tax max was “making the system more progressive and minimizing the added burden for low- and moderate-income workers.” Policy makers had no idea in the late seventies that everyone wages above the cap would grow so much faster than average.Read Full Article