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How growing income inequality is hurting Social Security

(AP Photo/Bradley C Bower, file)

Here’s another reason to be concerned about income inequality: it poses a direct threat to the already shaky fiscal health of Social Security, according to a report released Tuesday 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 of $118,500 and below. But the amount of revenue coming in is not as large as it could be, now thatan increasing share of wage growth is going to people who make more than that, and the wages of many Americans are stagnant, or even in decline. That is adding fiscal stress to a program already struggling with the demands of an aging population.

With more Americans reaching retirement age, Social Security is projected to eat through its funding reserves by 2033, assuming Congress took no action to bolster its finances. If that happened, 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 a program 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. And 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 wage growth year to year. Overall, some 17 percent of the nation’s wages escaped the tax, up from 10 percent in 1983. The increase in the share of wages exempt from the payroll tax has been jagged, but the upward drift has been unmistakable, as the chart below illustrates.

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. Also, if the payroll tax covered the same 90 percent of earnings that it did in 1983, the program’s coffers would be $1.1 trillion larger and a significant chunk of its shortfall would disappear.

“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.

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Raising revenue by taxing higher earners