In “How the Government Underestimated the Extent of Income Inequality,” I write about the reality of Social Security’s future - not the dire warnings you hear from alarmist pundits and politicians. Without modifications, Social Security will generate enough revenue to pay for three-quarters of future benefits. The shortfall isn’t because the retirement age is too low, it’s because the wealthiest Americans by-and-large avoid Social Security taxes.
Social Security was not designed for an economy as unequal as what we have today. Most income gains of the last two generations have gone to the richest Americans. Since 1979, while the top 1% saw their incomes grow by 138%, the wages of the bottom 90% have risen only 15%.
This wouldn’t be a problem if all income was subject to Social Security taxes. But it’s not. Rather, only income up to $118,500 is subject to the tax. For most of us, this doesn’t matter, but for the wealthy it makes a big difference. The top 10,000 or so wage earners will make about $4 million on average this year. They’ll be done paying into Social Security within the first week of the year. As you go up the income distribution, this gets ridiculous, with the top wage earners done paying into Social Security (for the year!) before lunch on their first day of work.
Adjusting the system to the reality of income inequality is an easy way to make it solvent. By taxing all wages (not to mention capital gains) for Social Security, we can ensure that one of America’s most cherished public programs survives for generations to come. It’s not so unreasonable. A bipartisan coalition eliminated the cap on medicare taxes in 1994. A similar cross-aisle effort is needed again.