Sunday, February 15, 2015

Should We be Addressing Social Security Funding Problems at the Front End? New CAP Study

George Washington University Law Professor Naomi Cahn sent us a link to an interesting study that seeks to demonstrate the impact of income equality -- and wage stagnation for low and middle income workers -- on the long-term solvency of Social Security. 

In a release accompanying the release of its study, the  Center for American Progress (CAP) explains: 

"Specifically, CAP’s issue brief finds that the trust funds would be $753.8 billion larger had the average worker’s wages kept pace with productivity growth between 1983 and 2013, thereby reducing the expected 75-year shortfall of the trust funds by 6.8 percent. The brief also shows that the trust funds would be greater by more than $1.1 trillion had the maximum taxable wage base remained fixed at 90 percent of earnings over the same time period, reducing the expected 75-year shortfall by 10.1 percent. Both scenarios would have added years of additional solvency to the Social Security trust funds. These findings come on top of Social Security trustees’ projections that, looking ahead, freezing the taxable wage base at 90 percent today would on its own close more than one-quarter of the projected 75-year shortfall....

CAP’s brief outlines how, as a result of the [existing] cap on taxable earnings--$118,500 for 2015—Social Security’s funding is tied directly to the full wages that low- and middle-income workers earn—but not to the full wages that higher-earning workers receive. The brief finds that in 2013, the top 1 percent of earners took home nearly the same share of the nation’s total wage income as the entire bottom half of workers. As a result, income has shifted away from workers whose full earnings are subject to payroll taxes and toward high-income workers whose additional dollars are exempt."

The CAP report is the work of Rebecca Vallas (a former Borchard Fellow), Christian Weller, Rachel West, and Jackie Odum.Thanks for sharing this report, Naomi!

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The CAP Study that you cite seems to conflate two major issues confronting our nation. One is the growing income inequality with executive compensation packages rising to exceed the rewards of true entrepreneurs. The other is the intergenerational funding model that Social Security has followed since 1939.

Income inequality can be addressed directly just as minimum wages have been addressed directly. Since minimum wage laws are both constitutional and economically salutary, maximum wage laws should also be sustainable and politically feasible.

From its original enactment in 1935 until the 1939 amendments, Social Security was premised on the principle that every generation should provide for its own retirement over its working lifetime. This required maintaining individual equity (fairness) and striving for social adequacy. A modicum of income redistribution was inherent in the retirement income formula.

The addition of disability benefits as a mandatory insurance program came later. In 1939 the law was revised to transfer the contributions of the working generation to prior generations who had not paid into the system because it had not been in existence. That change deprived the working generation of the interest earnings on their contributions that might otherwise have sustained their benefits.

As an aside, the 1939 amendments also added family benefits and transformed what had been an old age insurance program rooted in individual equity into a family-based economic security program. It is this broader social concept, combined with the political nature of Congress, which is the primary overseer of the program, that has caused the recurrence of crisis and response which has characterized the system since. The program shifted from actuarial principles to social scientific collective thinking as is reflected in its reliance on 75 year cash flow projections, instead of modeling the full term of the program’s commitments.

Since 1939, the system has been no more than a cash flow program operating on a pay-as-you-go basis. This means that generational cohorts with low birth rates are disadvantaged relative to those with high birth rates. It is a structure in which intergenerational fairness has been sacrificed to political expediency, and in which popular plausibility has supplanted reasoned scientific soundness.

The challenge of income inequality is different. That seems to have arisen from the cultural acceptance that functionaries who are the stewards for enterprises they inherit from prior managers should be paid as though they had a substantial ownership interest in the enterprise that they are hired to manage. That has scaled up the compensation packages of the barons of industry to unconscionable levels, often at the expense of those in the lower and middle ranks of the same enterprises. Functionaries, who rise through a corporate hierarchy, are rewarded as though they were visionary risk takes on the same scale with the great entrepreneurs who have advanced American prosperity.

One might hope that such extravagance in the board room and executive suite might be rectified by new competitive enterprises that would supplant the old by delivering better value to customers. Unfortunately, that has not always been the case since entrepreneurial replacement of outmoded organizations takes time. Entrepreneurial enterprises often start small and it can take decades before the outmoded enterprises of the past wither away.

These two issues – Social Security funding and excessive rewards for executive functionaries – can easily be conflated in an ideological struggle to redistribute wealth from those who are over-rewarded to those whose labor is exploited. But it might be better to stand back and look at the overall economy and society with the detachment of an historian or cultural analyst, to see if there aren’t public policy positions that might be more effective than micromanaging a single governmental program.

Posted by: Jack Cumming | Feb 15, 2015 11:01:00 AM

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