Saturday, August 1, 2015

Stagnant Wages Reason for Social Security Shortfall

"Wage Growth Continues to be the Key to Social Security Solvency"

Originally posted on July 24, 2015 by Dean Baker at the Center for Economic Policy Research

The 2015 Social Security trustees report again points to the importance of broadly based wage growth to the finances of the Social Security system. The 2015 report shows that the combined Old Age and Survivors Fund and Disability Insurance Fund will first face a shortfall in 2033, one year later than projected in the 2014 report. Taken separately, the Disability Insurance fund is projected to face a shortfall at some point in 2016.

The combined projected shortfall for the two programs is 2.68 percent of payroll over its 75-year planning horizon. This is down from a projected shortfall of 2.83 percent of payroll in the 2014 report. This improvement stems from a number of small changes in assumptions that more than offset the negative impact of adding a year of large projected deficits (2089) in place of a year of surpluses (2014).

Wage growth is the key to the program's solvency for two reasons. The first is that the upward redistribution of wage income over the last three decades has played a large role in the projected shortfall. As income has been transferred from ordinary workers to those at the top of the wage distribution, a larger share of wage income has escaped taxation. When the Greenspan Commission set the cap for taxable wages in 1983, it covered 90 percent of wage income. Currently the cap only covers around 82 percent of wage income. If the cap had continued to cover 90 percent of wage income, the projected shortfall would be roughly 40 percent less than it is now.

The other reason why broadly based wage growth is key to the program's continuing solvency is that the burden of possible future tax increases would be much less consequential if most workers will share in the gains of economic growth. The Social Security trustees project that real wages will rise by more than 34 percent over the next two decades. (They are projected to rise by another 30 percent over the following two decades.) Even if the payroll tax is increased by three percentage points, it would take back less than one-tenth of the projected rise in before-tax wages if wage growth is evenly shared. On the other hand, if most of the gains from growth continue to go to those at the top end of the distribution, any tax increase will be a major burden.

The weakness of the economy, in addition to the upward redistribution of income, has been the major factor in the immediate problems facing the disability insurance (DI) fund. The lower than projected wage growth, coupled with a large drop in employment associated with the collapse of the housing bubble, has lowered the revenue of the DI fund by more than $160 billion over the seven years compared with the projections that had been made before the downturn. While the DI program was projected to face problems even before the recession, had growth continued as projected it would have been able to pay full scheduled benefits until 2025.

While many politicians have tried to imply there is some fundamental problem with the structure of the DI program, it is clear that full funding can be maintained with minor fixes, such as reallocating revenue from the Old-Age and Survivors Insurance program. The financial health of both programs as they are now designed will depend on the prospect for maintaining high levels of employment and wage growth.

It is worth noting that in spite of the impact of the Great Recession on the revenues of both Social Security and Medicare, the finances of the two programs taken together have improved enormously in the Obama presidency, primarily due to the lower projected rate of increase of health care costs. In 2008, the combined shortfall for the two programs over their 75-year planning horizon was equal to 2.21 percentage points of GDP. The combined shortfall for the 75-year planning horizon in the 2015 report is just 1.26 percentage points of GDP. This improvement comes in spite of the fact that the 2015 projections include 7 additional years of large projected deficits (2083-2089).

It is remarkable that this improvement in the projected finances of these programs has not received more attention. It would be politically difficult to enact a combination of revenue increases and benefit cuts that would achieve a comparable improvement.


  1. Rep. Becerra introduced legislation that would combine the Social Security Old Age and Disability Trust funds. Such a move would improve their solvency and ensure that America’s disabled workers and retirees can continue to receive their earned benefits well into the future. According to the 2015 Social Security Trustees report, the SSDI trust fund would no longer be able to pay full benefits in 2016 unless Congress takes action. Becerra’s bill would ensure that both remain solvent through 2033.

  2. Robert Reich also mentioned this and the Greenspan Commission in 2011 when the cap was then $106,800 (today it’s $118,500)

    Besides raising or eliminating the cap, I also proposed taxing capital gains for Social Security as well. I always say, “If they won’t pay us, then we should tax them.”

    Otherwise, the hoarded cash of the mega-rich just sits idle collecting dust in offshore bank accounts --- until they die, then they leave all their money in "perpetual dynasty trusts".

  3. This may be off topic, but you may be interested to know this. The proposed TPP trade pact would integrate the U.S. economy with one of the world’s most corrupt and notorious slave states, Malaysia, where millions of men women and children are routinely sold into forced labor and the sex trade. Last Monday, the State Department took Malaysia off a list of countries with particularly egregious human trafficking records, just in time to clear the path for the country’s participation in the Trans-Pacific Partnership (TPP) negotiations.

    1. It's never off topic to remind people of these terrible trade deals that our government is always trying to shove down our throats.