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Inequality of wealth is contributing to Social Security's problems

It's unfortunate that an economist such as Peter Morici ("Yes, Social Security is a Ponzi scheme," Sept. 22) would take a partisan political position on Social Security and spread needless alarm about its future by baselessly calling it a Ponzi scheme.

Ponzi schemes are short-lived investment frauds. Social Security is a social insurance program which has paid benefits for over 70 years and is projected, under very pessimistic economic assumptions, to be able to pay full benefits for the next 27 years and 80 percent of scheduled benefits into perpetuity.

And those benefits, even if nothing is done to address the projected shortfall, due to intervening productivity and wage increases would be about 25 percent larger than today's seniors receive.

Contrary to Professor Morici's contention, the number of people paying into Social Security does not have to constantly increase for the system to work. Average earnings, average hours worked, ratio of wages to total compensation, real-wage differentials, tax rates, percentage of workforce participation, unemployment rates, fertility rates, mortality rate, consumer price index changes, immigration levels, GDP projections, interest rates, and worker productivity all figure into determining program solvency. Social Security doesn't need a geometric increase in the number of participants. As long as the amount of money coming into the system maintains a rough balance with the money paid out as benefits, the system can continue forever.

The unique demographic bulge caused by the retirement of the Baby Boom generation is no surprising development. It was taken into account when the Social Security Act was amended in 1983. Benefits were cut and employment taxes were raised for this reason.

Two main factors account for why there is now a projected gap between scheduled benefits after 2036 (or 2038 depending on your source) and the amount the pay-as-you-go system is projected to be able to pay from payroll taxes. The extended jobs recession, projected to continue, is one factor. There may not even be a funding gap if the economy resumes growth at a more normal pace. But assuming it doesn't, the other thing that has changed between 1983 and now is that almost all the income gains in our country have gone to a few at the very top. Instead of people who mostly earned less than the payroll tax "cap" (currently $106,800) getting raises, thereby increasing the amount they pay into the trust fund in payroll taxes, the raises went to people who already earned more than that amount, so the increased income is not being taxed and contributing to the program.

As a result, payroll taxes are no longer being assessed against the traditional 90 percent of national earnings and now only cover about 80 percent (and falling) of earned income. A substantial increase in the payroll tax cap is needed to make the tax fairer and more progressive. This would easily bring the system into balance virtually forever, allowing the full scheduled benefits to be paid without cutting peoples' hard-earned and, for most, essential Social Security benefits.

Kenneth Grim, Columbia

Copyright © 2014, The Baltimore Sun
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