Social Security Inequation: This is Rich, Living Longer While Everyone Else Enjoys It Less; Putting Two Together

Here are two stories I came across that seemed like they absolutely had to go together. Since I’ve not seen anyone else pairing them, we’ll do it here. One is from economist Paul Krugman, the other from Robert Reich, also an economist, and the former Secretary of labor under President Clinton. Each concerns Social Security, the wealthy and why the system may not be anywhere as close to insolvency as some (are they all Republicans?) would have the rest of us presuppose.

Krugman: Some of Us Are Living Longer- The Rich

The Krugman piece was the first to catch my eye back in November. It concerned the suspect work product of the National Commission on Fiscal Responsibility and Reform tasked with finding a supposedly bipartisan solution to the nation’s fiscal problems. (See: The Hijacked Commission, by Paul Krugman, November 11, 2010.)

The commission announced its plan November 10th. As Mr. Krugman points out, the section of the plan on tax reform was summarized in seven bullet points the last of which was “Reduce the Deficit” while the first was “Lower Rates.” The commission was, in fact, all about tax reduction being a priority, stating that one of its “Guiding Principles and Values” was to “Cap revenue at or below 21% of G.D.P.”

Krugman writes many great articles, but this was one of his best. The whole article is worth reading but for purposes of this National Notice story what caught my eye about Social Security was this:

Let’s turn next to Social Security. There were rumors beforehand that the commission would recommend a rise in the retirement age, and sure enough, that’s what Mr. Bowles and Mr. Simpson do. They want the age at which Social Security becomes available to rise along with average life expectancy. Is that reasonable?

The answer is no, for a number of reasons — including the point that working until you’re 69, which may sound doable for people with desk jobs, is a lot harder for the many Americans who still do physical labor.

But beyond that, the proposal seemingly ignores a crucial point: while average life expectancy is indeed rising, it’s doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age.

Reich: Some of Us Are Paying Less Into the Social Security System- The Rich

The Krugman statistics about who, exactly, is living longer came to mind when I came across the Robert Reich piece, the basic point of which was that there is no problem with the solvency of the Social Security system except that the wealthy are now paying proportionately less into than ever before and because “Now a much larger portion of total income goes to the top -- almost twice the share they got back then.” (See: How to fix Social Security, Marketplace, Wednesday, February 23, 2011.)

As Reich points in his commentary on Marketplace and in a column that appeared a number of places, including in the Christian Science Monitor and the Huffington Post (Budget baloney: Social Security isn't to blame for deficit, and the Best Way to Fix It Permanently, February 16, 2011) the solvency question was addressed and supposed to have been dispensed with by Alan Greenspan’s Social Security commission back in 1983 by gradually increasing payroll taxes and raising the retirement age.

Why hasn’t the Social Security system stayed in balance and “fixed for good” as Alan Greenspan’s 1983 commission expected? Reich explains that it is all due to fact a shift of income to wealthier Americans who pay proportionately less to Social Security because their contributions to the system are capped after they earn more that $106,000:

The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income.

It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.

Putting Two Together

In other words, putting Krugman’ and Reich’s points together, the wealthy are living longer, longer then the rest of us, presumably getting more Social Security benefits paid out to them as a result, while at the same time they are paying proportionately less and less of their income into the Social Security system. And the system is becoming unbalanced because the wealthy are hoarding a greater and greater proportion of the nation’s income, thus subjecting an increasing amount of that income to an artificial cap that’s now limiting how much of the nation’s income is going to support Social Security to a lower percentage than everyone expected when things were last put in balance. . . That’s because in 1983 no one expected the degree to which income inequality would increase in the last 28 years.

Solutions Within Reach

Reich points out that the solution for balancing the system is therefore easy. Since the whole problem is that the shift in income to the wealthier earners has exempted more national income from going into the system by virtue of that cap on the ceiling income over which wealthier earners are exempted from paying into the system, all you have to do is raise that ceiling. Then the percent of income being subject to Social Security contributions will go back to the percent it used to be:

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.

Presto. Social Security’s long-term (beyond 26 years from now) problem would be solved.

That’s the easy solution. Another solution Reich doesn’t mention would be to reverse the unexpected trend in income inequality. Do wealthiest earners really need to be earning twice the share of total national income they were earning back in 1983? Does the top 1 percent in the country need to now be earning "more than 20 percent" of the nation's total income instead of the 11.6% that very lucky and elite 1% was earning back in 1983?

Those two possible solutions both involving asking for a contribution from the longer-living (and greater benefit-collecting) rich aren’t the ones being talked about however. For some reason, increased taxes for the well-to-do always seem to be off the table. Instead, what is being talked about is having the rest of the public shoulder the extra burden resulting from the increasing income inequality. As Krugman noted, the National Commission on Fiscal Responsibility and Reform is suggesting an increase in the retirement age. Alternatively, benefits might be reduced.

As for Reich’s suggested solution, Reich makes this point:

Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn’t make it into the President’s budget.