The real reason Social Security is going broke — and how to save it forever

They have reason for concern. The trustees of the Social Security Trust Fund — of which yours truly was once a member — just released their annual report on Social Security’s future. The report says Social Security will be able to pay full benefits until 2034 but then faces a significant funding shortfall. After 2034, it can pay only about 80 percent of scheduled benefits.

The biggest reason Social Security is running out of money is not what you (and the media) think it is: that boomer retirees are, or will soon be, soaking it all up.

The Social Security trustees anticipated the boom in boomer retirements. This is why Social Security was amended back in 1983, to gradually increase the age for collecting full retirement benefits from age 65 to 67. That change is helping finance the boomers’ retirement.

So what did the trustees fail to anticipate? Answer: the degree of income inequality in 21st century America.

Put simply, a big part of the American working population is earning less than the Social Security trustees (including me) anticipated decades ago — and therefore paying less in Social Security payroll tax.

Had the pay of American workers kept up with what had been the trend decades ago — and kept up with their own increasing productivity — their Social Security payroll tax payments would have been enough to keep the program flush.

At the same time, a much larger chunk of the nation’s total income is going to the top than was expected decades ago.

Here’s the thing: Income subject to the payroll tax is capped. Every dollar of earnings in excess of the cap is not subject to Social Security payroll taxes. This year’s cap is $160,200.

The Social Security cap is adjusted every year for inflation, but the adjustment is tiny compared to what’s happened to incomes at the top.

As the rich have become far richer, more and more of the total income earned by Americans has become concentrated at the top. Therefore, more and more total income escapes the Social Security payroll tax.

The obvious solution to Social Security’s funding shortfall 11 years from now is to lift the cap so that the super-rich pay more in Social Security taxes.

To make sure it’s the super-rich — and not the upper middle class — who pay, it makes sense to eliminate the cap altogether on earnings in excess of, say, $400,000.

As it happens, Joe Biden campaigned for the White House on a plan to do exactly this.

What happened to that plan? The budget Biden proposed last month made no mention of any tax increase linked to Social Security (although it did include tax increases on high earners and corporations as a way to extend the solvency of Medicare by 25 years).

I suspect Biden’s plan for Social Security was a casualty of the bare-knuckled politics surrounding both Social Security and the debt ceiling. Biden doesn’t want to give Republicans any opening to debate Social Security in the coming fight over lifting the ceiling.

Hopefully, he’ll revive his plan for Social Security after that brawl. The long-term future of Social Security depends on it.

What do you think?

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Reminder: Please join me Friday for the fourth class in my Wealth and Poverty course, right here on this page. We’ll be taking a deep dive into the widening inequalities of place — the geographic sorting mechanism that’s making the poor even poorer and the rich even richer, as well as shrinking the middle class.

If you missed the earlier classes, no problem. You can pick up with the fourth, or retrieve class one here, class two here, and class three here.