Tuesday, June 5, 2012

CBO: Income Inequality Depresses Social Security Revenue

The long-term budget outlook released by the CBO today has plenty of dire news if the US continues along its present path.  A number of others are chronicling some of the bad news, so I'll just make a quick observation about this report's comments on Social Security.

Since there is a cap on the income that is taxable for Social Security, an economic cycle in which most economic gains go to people whose income is already above the cap would seem to harm Social Security collections, causing them to not keep pace with the growing economy.  The CBO seems to agree that this dynamic is taking place:
When earnings inequality increases, as it has in recent decades, the taxable share of earnings declines because a greater share of income is above the taxable maximum.
The CBO projects increasing earnings inequality over the next few decades, which would cause the share of earnings subject to the payroll tax to fall from above 85% to around 83%.

It's also worth noting that, according to the CBO, the Boomer generation and Gen X will on average be paying more in taxes into Social Security than they receive in benefits.  It says that, taken all in all, Americans born between the 1940s and 1980s will pay on average about as much into Social Security as they will receive in benefits.  The long-term imbalances, it says, are in part caused by the benefits collected by Americans who were born prior to 1940.  Reagan's Social Security reforms in the 1980s helped correct the imbalance between benefits and taxes.  (However, the report does begin to suggest a rising imbalance for later generations; taken by itself the generation born in the 1980s will collect a little more in benefits than it pays in taxes, according to the CBO.)

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