How Income Inequality Undermines Social Security

Merrill Goozner

Published 10/31/11 in The Fiscal Times:

The income gap between the wealthy and everyone else has grown sharply since 1979, the Congressional Budget Office reported last week, while the Social Security trustees pointed out last June that for the first time since the early 1980s, the nation’s retirement system will dip into its interest earnings to pay the bills.

Although at first blush these two facts seem to be unrelated, they are intimately connected. Nearly 40 percent of the Social Security shortfall can be directly traced to the growing share of the nation’s total wages that are going to people in the upper income brackets.

Why does the uneven distribution of wage growth matter for Social Security? Each year, the Social Security trustees raise the level of wages subject to taxation by the average wage increase. But when people in the top income brackets get raises that are significantly higher than average while the bottom 80 percent get raises that are below average, a smaller portion of the total wage pie gets taxed.

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