(C) Common Dreams
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Increased Wage Inequality Has Reduced Social Security’s Revenue [1]
['Jessica Vela', 'Associate Director', 'Media Relations', 'Vice President', 'Senior Director', 'Government Affairs']
Date: 2024-12
In 2020 and 2021, the federal government provided extraordinary direct aid to individuals in order help them through the economic shocks of the pandemic. But the largest source of financial stability during this crisis was, as always, Social Security. Approximately 65 million retirees, disabled workers, and survivors of deceased workers receive Social Security checks every month. This includes roughly 9 out of 10 elderly Americans. While the highest wage earners have more ability to save and invest for retirement, many low- and middle-income families do not have this luxury and find themselves extremely dependent on Social Security’s monthly payments.
Social Security benefits are paid from dedicated trust funds that are funded predominantly by payroll taxes. Those trust funds are sufficient to pay all benefits until 2034, according to the program’s trustees, but only about three-quarters of benefits after that. However, rising wage inequality is reducing Social Security revenue, thus increasing this long-term shortfall.
Growing wage inequality reduces the revenue flowing into Social Security because of how the Social Security payroll tax is structured. Nearly all of the program’s revenues come from a federal payroll tax of 12.4 percent on workers’ first $147,000 of annual wages. Payment of this tax is split in two, with the first 6.2 percent paid by employees and the second 6.2 percent paid by employers. The self-employed pay both halves of this tax. For many working-class people, this is a real burden: Nearly 2 in 3 Americans pay more in payroll taxes than in income taxes.*
Yet, because wages above the $147,000 maximum go untaxed, the relatively few workers who earn more than that are essentially exempt from Social Security taxes after they reach the maximum. A CEO with a $1 million salary, for instance, would have only contributed to the Social Security system through February 23 of 2022.
The taxable maximum (or cap) rises in line with average wage growth every year. But because average wages have grown more slowly than those at the top of the distribution, the share of wages above the taxable maximum has increased. Since 1983, the share of untaxed earnings has risen from 10 percent to almost 17.5 percent. This dramatic increase means that the Social Security payroll tax misses a substantial and growing amount of potential revenue.
Moreover, this increase is not being driven by some large mass of upper-middle-class workers. As shown in Figure 1, it is mostly due to a significant increase in the wage share of the top 1 percent. Between 1983 and 2020, the share of earnings going to the highest percentile of wage earners rose from 8.8 percent to 13.5 percent—an increase of 4.7 percentage points.** The greater share of wages going to the top 1 percent thus single-handedly accounts for 62 percent of the increase in untaxed earnings.
Figure 1
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[1] Url:
https://www.americanprogress.org/article/increased-wage-inequality-has-reduced-social-securitys-revenue
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