What's really happened to Social Security

Robert Reich  -  The common understanding is that Social Security’s shortfall is due to the huge postwar baby boom, now retiring, and to America’s increasing life expectancy. The usual recommended fix is to reduce Social Security benefits or raise the age of eligibility. As Speaker of the House Mike Johnson, warned Monday, “entitlement programs” like Social Security “have to be adjusted and fixed.” He said Republicans will introduce a plan to do that. Brace yourselves.

I used to be a Social Security trustee, and I call bullsh*t. The baby boom can’t be blamed for Social Security’s shortfall. The Greenspan Commission, which in 1983 recommended the reforms that Congress then made — raising Social Security payroll taxes and also raising the eligibility age for collecting Social Security benefits — knew all about the baby boom and figured it into its calculations. (Early boomers like me can now start collecting full benefits at age 66; late boomers born after 1960 have to wait until they’re 67 to collect full benefits.)

Americans’ increasing life expectancy isn’t at fault, either. While wealthier Americans are living longer, that’s not the case for lower-income Americans. The Urban Institute estimates that life expectancy in the top 20 percent of income-earners is 91 years for people born in the 1990s, four years more than people born in the 1950s. Yet the life expectancy in the lowest 20 percent of income-earners is fewer than 80 years.

So what’s the real cause of the Social Security shortfall? What did Greenspan’s commission fail to predict? Widening inequality.

Remember, the Social Security payroll tax applies only to earnings up to a certain cap. This year, that cap is $184,500. Earnings at or below this amount are taxed at 12.4 percent. The cap rises every year according to a formula roughly matching inflation.

Back in 1983, the cap was set so the Social Security payroll tax would hit 90 percent of total income in America. That 90 percent figure was built into the Greenspan Commission’s fixes. The Greenspan commission assumed that, as the cap 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 83 percent of total income in America. It went from 90 percent to 83 percent because a steadily larger portion of the nation’s 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.