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Wage Gap Figures Social Security Sickness

Seventy years ago Franklin D. Roosevelt established the Social Security System to give America’s struggling seniors a lifeline out of poverty. The problem of economic survival in old age and retirement is usually presented as a sort of modern day version of the fable of the grasshopper and the ant – the story of the thrifty and forward looking ant who stored up grain during the producing season to eat during the desolate time ahead in contrast to the irrational shopper grasshopper who merrily consumed all summer without putting aside anything and consequently faces starvation in the winter.

A growing share of income in the past twenty-five years has been paid to people who earn more than the cap. Social Security payroll taxes are levied on wages up to a certain cap, currently $90,000 a year, which rises annually with the average wage. This increasing concentration of income at the upper level of society is an important reason why, from 1980 through 2000, taxable payroll fell to 83% of wages of contributing workers from 90%. This is also the reason why working class wages have stagnated. As higher income people take a bigger share of the increases in the nation’s productivity, less is available for those who do most of the physical work to produce it. Both these trends partially were reversed in 2001, but there are signs that inequality is growing again. What’s more, the wealthy refuse to make up for what they have done by trying to destroy the system that is specifically designed to help those who need financial assistance the most in retirement. For many critics of Mr. Bush, the most difficult problem inherent in the design of Social Security and the one for which establishment of private accounts is generally offered as a direct solution is the rate of return issue.

The debate over Social Security has managed to obscure out other issues in American Society including the widening gap between the rich and the poor and surging health care costs. As incomes become more unequal Social Security’s tax base has shrunk. However, these two issues play an important role in Social Security’s problems. Further, as the population ages, benefits paid to retirees have steadily outstrip payroll taxes of workers. The reason is that taxable payroll is expected to expand more slowly than is GDP.

This is why administration officials and many independent analysts disagree saying the link between overall economic growth and investment returns is weak. Even if inequality stops widening, Social Security’s tax base probably would continue to be worn out because of rising health care costs.

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