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Income inequality threatens Social Security, report warns

 
Published Feb. 11, 2015

WASHINGTON — Income inequality poses a direct threat to the already shaky fiscal health of Social Security, according to a report released this week by the left-leaning Center for American Progress.

The nation's old-age pension and disability insurance program is funded by a payroll tax that this year applies to wages at or below $118,500. But the revenue coming in is not as large as it could be, given that an increasing share of wage growth is now going to those making more than this and the wages of many Americans are stagnant or even falling. These factors are adding fiscal stress to a program already struggling with an aging population.

With more Americans reaching retirement age, Social Security is projected to eat through its funding reserves by 2033, assuming Congress takes no action to bolster its finances. If that were to happen, Social Security trustees have said the program would be taking in only enough money to pay 75 percent of promised benefits — an unthinkable fate for an arrangement that nearly two-thirds of seniors rely on for most of their retirement income.

"Upward redistribution of income in the United States has meant that income has shifted away from the workers whose full earnings are taxed and toward high-income workers whose additional dollars are exempt," read the report.

The top 1 percent of wage earners took home about 12.9 percent of the nation's total wage income in 2013 — just short of the 13.7 percent that was earned by the entire bottom half of wage earners — the report said. Further, many of the richest Americans count on capital gains for most of their income, but capital gains are exempt from the payroll tax.

The tax cap is adjusted each year in step with average annual wage growth. Overall, about 17 percent of the nation's wages escaped the tax, up from 10 percent in 1983.

The report says that the dire picture would be a bit different if wage increases had kept pace with the productivity gains of workers over the past three decades. .

"While policymakers cannot undo the past, they can take action to improve Social Security's fiscal outlook by implementing policies that boost wages, combat rising inequality and modernize the program's revenue structure to reflect today's economy," the report said.