The Wall Street Journal
(pay site) has an
on an old and growing problem—the widening gap between the folks at the top of the income pyramid and the rest of us.
Turns out the pay gap is part of what threatens Social Security.
To recap for those who have not been paying attention for the past two generations: in the United States, workers at the bottom two or three quintiles have seen their wages stagnate (or decline) since the early 1970s, while those in the top quintile have seen their incomes increase. The increases have been more dramatic as you break down that top 20 percent: the top 10 percent did better still; the top one percent way better than the nine percent just below them, and the top one tenth of a percent-the 300,000 or so Americans whose 2005 per capita income exceeded $1.7 million-have basically unmoored themselves from reality.
The best illustration of the nation's income distribution can be found
. Remember, it's not "class warfare" if it's only the facts.
Anyway, so the
has connected the pay of "top earners" to the problems of Social Security:
The problem is the "ceiling" on income subject to the Social Security tax. Those who earn below this magic number—currently $106,800—are encouraged to forget it exists. If you look at your pay stub, you can see that 6.2 percent of your earnings go to Social Security (your employer pays another 6.2 percent on your behalf). But every dollar you earn over that $106,800 limit is not subject to that tax. Plus, your employer can, and usually does, give you the 6.2 percent it would have paid to the feds. It's another way the rich pay less in taxes than the poor. As the
The story doesn't explain two things, one of which the commenters harp on over and over, and the other of which is overlooked. The thing lots of
note is that Social Security benefits are capped along with the cap on income taxed. That's fair, they say, and raising the cap without increasing the benefit would be communistic. (Really,
commenters are pretty adamant about stuff like this. They also assume that people who get paid $1 million a year, by definition, "earned" it, despite the evidence).
Overlooked in the story and the comments is the presumption under which Social Security was designed. I don't mean the lower life expectancies common in the 1930s, '40s and '50s. I mean the higher marginal tax rates on the very wealthy. Although it's mostly forgotten now,
exceeded 90 percent in the post-war period, and were still 70 percent until 1980. This was for income above $200,000-equivalent to about $500,000 today.
Although they were blamed for the "stagflation" that gripped the economy in the late 1970s (instead of the prosperity of the '50s and '60s), those kinds of confiscatory tax rates kept the country's real income distribution much flatter than it is today, and in some ways made up for the cap on Social Security taxes (and Medicaid, which was capped until 1993).
Since 1980, the amount of money the very well-paid get to keep has skyrocketed, skewing everything from the luxury goods market to the housing market, while creating jobs for a whole class of "wealth managers" (see, for example A.I.G. and Bernie Madoff) that were nearly nonexistent in decades past. But the most interesting thing about the change has been the way the rich have perpetuated their style of "earning," by awarding themselves raises far in excess of those enjoyed by their underlings. The
explains how this "other" compensation goes mainly untaxed. The top six percent earned $2.1 trillion in 2007:
It gets better, for the rich. And the story explains one reason why big corporations oppose a lifting of the Social Security cap. Turns out the cap itself provides them with a kind of loophole that allows them to lavish even more money on their top "earners," and they do this to make up for the Social Security cap:
That's only fair, right?