How Social Security Could Narrow Rich-Poor Gap

Article excerpt

When Congress created the Social Security system in 1935, 8 of 11 people reaching retirement age were not just poor - they were indigent. They had almost no income. Some lived on the street, many with their children. They relied heavily on charity to survive.

Those drafting the Social Security bill wanted to redistribute income to these destitute retirees. They succeeded. Today's seniors are relatively flush.

Now, the income gap between the rich and poor in the United States has gotten wider again. A reformed Social Security could help readjust that balance.

It's unclear whether President Bush's plan will do that. But Social Security could be altered to accomplish that goal, says Robert Shiller, an economist at Yale University. He frets that the growing rich-poor gap "is going to fester eventually. It will be a source of resentment."

So he suggests that both the federal income tax and Social Security be indexed so that any growth in this income gap be offset by raising the progressivity of the tax and retirement systems. Here's how it might work:

Between 1979 and 2002, the top 1 percent of the population enjoyed a 111 percent increase in their real income, the Congressional Budget Office reported recently. The top fifth enjoyed a 48 percent gain during the same period while the bottom fifth got only a 5 percent income hike. Following Dr. Shiller's theme, income- tax rates could be raised on high incomes. A special tax-based benefit for the working poor could be enlarged and their Social Security pensions boosted to reflect a higher share of their income while working.

A more modest proposal would be to raise the level of earnings subject to the Social Security tax. Currently, the system taxes only the first $90,000 of income, while a growing number of Americans earn more. In 2001, for example, 15 percent of Social Security contributors made more than the taxable earnings maximum, up from 10 percent in 1983. That trend has happened despite the year-by-year increase in the taxable maximum. That translates into lost funding for Social Security. In 1983, the sum amounted to $305 billion, notes an Economic Policy Institute study. By 2001, that had grown to $775 billion. (To adjust for inflation, both figures are reported in 2004 dollars.)

"More than half of the currently projected shortfall over the 75- year planning horizon is attributable to upward redistribution of wage income since 1983," notes Dean Baker of the Center for Economic and Policy Research, a Washington think tank. …