When folks start talking about “fixing” Social Security, mostly they talk about cutting benefits. Sometimes – if they are liberals or lefties – they’ll talk about raising taxes (e.g., “popping the top”). But what almost nobody talks about is inequality.
The idea is pretty simple. In the past few decades, a greater percentage of the wealth our society produces has been going to folks at the top. That’s meant relatively less money is collected in payroll taxes. Krugman lays out the impact:
a substantial part of our social insurance system — Social Security and the hospital insurance portion of Medicare — is funded through dedicated payroll taxes. If payrolls lag behind overall national income, this will tend to leave those programs underfunded given the way the laws are currently written.
So as a percentage of GDP going to labor has fallen, Social Security and Medicare have taken a huge hit. That’s why earlier efforts to “fix” Social Security failed.
back in the 1980s the Greenspan Commission supposedly fixed Social Security’s finances for 75 years, that is, until 2060. Why, then, do most projections show the trust fund running out well before then? Not because life expectancy is rising — that was already built into the projections. No, the big reason is rising inequality, which has led to a growing share of income coming above the payroll tax cap, so that SS revenue lags behind overall compensation. And yet the conventional wisdom is that we should respond to a financing issue caused by rising inequality by slashing benefits, further increasing inequality.
But there’s no reason it has to be this way. If we don’t treat the change in who gets what percentage of the wealth our society generates as natural or inevitable, we could look at this problem very differently.
the money is still there to support the programs, it’s just coming in the form of capital rather than labor income. There would be no problem, at least in economic terms, in continuing the programs by adding revenue from general taxation, maybe even from dedicated taxes on capital income.
It is truly amazing how effective our elites have been at narrowing not just what problems we talk about but how we talk about them. That’s the bad news. The good news is that there’s plenty of room to force the debate wide open. There’s no reason that every single time some blithering pundit talks about cutting Social Security that we can’t use it as an opportunity to talk about cutting inequality – assuming, of course, we’re ready to fight to win.