Mirabile Dictu! WSJ Points Out the Rich Getting Richer is Bad for Social Security

Is the leopard changing its spots? First we have the Wall Street Journal, of all places, lambasting Goldman, while incredibly, the Washington Post springs to its defense. If that isn’t bizarre enough, today we have the Wall Street Journal, which along with just about every mainstream media outlet, likes to inveigh about coming Social Security deficits, points out something quite underappreciated: that the combo plate of ceilings on payroll taxes and more income flowing to the top echelon of society (some in the form of compensation that comes via tax advantage capital gains) means there is a lot of labor-related income that is not subject to Social Security taxes.

A dose of Koyaanisqatsi is in order.

As an aside, the hysteria about Social Security is way overdone. Yes, it needs to be fixed, but on the one to ten degree of difficulty, this one is not hard. Social Security was created when the average lifespan was 69. We need to do some combination of raising the age at which workers can receive payment, eliminate the ceiling on payroll taxes, and end the tax breaks (at a minimum) for the upper middle income and wealthy (85% of Social Security payments are exempt from taxes). Eliminating the ceiling alone would mean Social Security was adequately funded for the next 75 years.

Back to the Journal. 1/3 of all pay goes to “highly compensated employees,” meaning those who earn more than the Social Security ceiling, and their pay has been rising faster than for the rest of the workers. And that exclude stock-based pay.

From the Journal:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S.,…
Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available. The compensation numbers don’t include incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits.

The pay of employees who receive more than the Social Security wage base — now $106,800 — increased by 78%, or nearly $1 trillion, over the past decade, exceeding the 61% increase for other workers, according to the analysis. In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.

The growing portion of pay that exceeds the maximum amount subject to payroll taxes has contributed to the weakening of the Social Security trust fund…

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year.

The magnitude of executive pay has been difficult to measure, even as policy makers grapple with ways to rein in compensation at companies receiving taxpayer bailouts…But payroll taxes provide an indirect way to calculate amounts executives receive…

Social Security data show that 6% of wage earners have pay that exceeds the taxable earnings base, and that their “covered earnings” above the taxable maximum totaled $1.1 trillion in 2007. Adding the portion of their pay below the taxable wage base, $991 billion, totals $2.1 trillion.

The $2.1 trillion figure understates executive pay, however, because it includes just salary and vested deferred compensation, including bonuses. It doesn’t include unvested employer contributions and unvested interest credited to deferred-pay accounts. Nor does it include unexercised stock options (options aren’t subject to payroll tax until exercised), and unvested restricted stock (which isn’t subject to payroll tax until vested; the subsequent appreciation is taxed as a capital gain).

Also not included in the total compensation figures is executive pay never subject to payroll tax. This category includes incentive stock options (which are generally taxed as capital gains), “carried interest” income received by hedge-fund and private-equity fund partners (also taxed as capital gains), and compensation characterized as a benefit (benefits generally aren’t subject to any taxes).

Benefits, a category that includes employer-provided health care and contributions employers make to rank-and-file pension plans, totaled nearly $1 trillion in 2007; it isn’t possible to tell what portion represents benefits for executives, such as life insurance.

The ability to delay paying payroll taxes on compensation, something that generally is available only to highly paid employees, is in itself an economic benefit that ultimately boosts paychecks…

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

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  1. Anonymous

    The oligarchy owns the media and they are using it to toss out table scrap scenarios for the masses.

    This is not a solution to the political/economic criminality and moral turpitude we are faced with but may get lots of media cycles.


  2. Anonymous

    Since Federal employees and Congress are exempt from social security, they are the last people with any right to complain about contributions.

  3. Richard

    Anonymous, you are free to have any foolish opinion you want to have, but you are not free to have your facts. Since Jan 1984 all Federal employees hired have been subject to and paying social security taxes (I know, I am one of them and since I keep my pay statements I have documentary proof). Google OPM, FERS and social security. As for Congress, most of them, Democrats and Republicans, are already quite rich and like the media folks, they have health care and it seem great to them so where is the problem. Unless they have some not so well off relatives who can enlighten them.

    If they raise the cap, I will end up paying more taxes. I would vote for it. As for those who say I could also pay their taxes for them, I will agree if they promise not to drive on the roads, never fly on a plane, stop drinking water from a tap or using it to wash, promise never to call a fire department for an emergency, promise never to call the police if a victim of a crime or cheated by a con-man, and promise never to use a court to defend a property right. Also, if a bunch foreigners with beards speaking Pashtun show up to loot their home, they can't call the Marines. Throw in forswearing to send kids to public schools or colleges, claiming for social security, medicare, and unemployment compensation. (I know a lot folks who use to work on Wall Street drawing unemployment compensation.)

  4. Dave L

    No, the Journal isn't changing its spots. This article is from the news side, which has always operated independently from the opinion page. Look for an editorial in a day or two that takes a flatly contradictory line on this, and ignores the evidence brought forward by the paper's own reporters.

  5. Bruce Krasting

    I follow these things and can't find a public source where the SSTF makes a statement, "we can fix the problem if we do away with the ceiling".

    So this information was provided to the WSJ on the side. I think that this story is one of those 'trial balloons' from DC and the WSJ is just giving it airtime.

    If that is the case then we should expect more on this from another source by Friday.

    I look at these income numbers and am puzzled. The story looks at this $1.1 trillion number for 07 as the basis for these conclusions. This is 09 folks. A lot of that 1.1T is up in smoke in 09.

    Some math $1.1 T *2.4% = $26bil

    So eliminating the ceiling adds just $26 bil to the pot.

    The SS is paying out $55 bil per month now. That number is rising with the boomers at a 10% rate.

    There is no way that an extra $26 bil a year 'fixes' this problem. That is not even close.

    Stay tuned there is more to come on this.

  6. Boris

    Bruce, your numbers are off. The tax rate for Social Security is not 2.4%; it's 12.4%, split 50-50 between employer and employee (largely to hide from the employee how much it really is, as far as I can tell).

    $1.1T * 12.4% = $136 bil. The article cites this number as $115 bil a year; not sure how that adds up.

    If the article's other numbers are right, the current revenue of Social Security would be 12.4% * (1.1T) / 0.17 * 0.83 (since the percentage of wages that _is_ subject to payroll tax is claimed to be 83%). That comes out to about $665 bil a year.

    Put another way, the proposal would increase revenues by about 20% (17/0.83).

    The Social Security folks are claiming that they can get revenues to not fall behind expenditures by raising the tax rate 16% (see http://www.ssa.gov/OACT/TRSUM/index.html), so if that happens to be true the above 20% hike (or more, if the fraction of income for the high earners keeps rising) should do the trick too.

  7. "DoctoRx"

    Of course revenues can be found to fix SS.

    My objection to some of the ideas in the post is that SS was always promoted as NOT welfare: you worked, you contributed, you earned your benefits. Thus the cap on taxing income! If a worker's benefit were indexed to contributions, that would be a different matter.

    Also: the more the government becomes beholden to the "rich" for revenue, the more we get to a California situation: what happens when the rich aren't so rich anymore?

    I therefore favor a broad-based tax. Let rates go up for all if they must. Raise the cap somewhat, of course. Remember Clinton put in a non-capped 2.9% "Medicare tax". So when top rates go to 39.6%, they will really be at 42.5%. Plus Bush I put in a phase-out on mortgage income deduction for high earners. Guess what: "Reaganomics" is already moribund.

    (Actually I think the whole idea of Social Security given coming demographics needs a TOTAL rethink.)

  8. Anonymous

    Eliminating the ceiling alone would mean Social Security was adequately funded for the next 75 years.

    At least you admit that your proposal is nothing but kicking the can down the road again. For shame.

  9. Anonymous

    SS is a very special scam. it's an accounting entry from govt to govt. plus, corporates that "contribute" payroll tax actually end up paying less of corporate tax because these taxes are deductible. so real "contributions" are much smaller than they seem. fixing SS is not that easy, and a 75 years number is a fantasy.

  10. locust

    Tie the Social Security cap to Senate salary. They vote themselves a raise, the cap goes up accordingly.

  11. Lord

    Actually, up to 85% of SS is taxable and is taxed for retirees with AGIs above about $32k. If 85% of SS is not taxed it is only because that is the number with incomes below that. I believe it is closer to 66% that is below that level. As a result there isn't much money to found here unless benefits are taxed from the first dollar, lowering their already modest incomes.

  12. Bruce Krasting

    Boris. Oops. I am not sure what I was thinking about this am. Not payroll taxes. Sorry and thanks.

    12.4% it is and that would add up to 136 or so bil. That comes to just shy of 1% of GDP.That is not what the economy needs.

    They would accomplish the same thing (tax the wealthy) if they just eliminated benefits from those who now and and the future will have that 'wealth'.

    This proposal makes SS much bigger. Wrong direction.

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