America the Unequal

The rich are getting richer while the middle class gets poorer. As Michael Tomasky points out, the growing economic inequality is bankrupting Social Security.

Michael Tomasky, 06/20/11

If you didn’t read Peter Whoriskey’s report on inequality in Sunday’s Washington Post, please do so now (well, as soon as you finish me!). It’s a very important piece of work that should shift the nature of the inequality debate in the capital (although I’m not holding my breath on that, alas). And it reminds me, in this open season on entitlements, of the important but very infrequently discussed link between inequality and Social Security -- why more of the former helps bankrupt the latter.

Whoriskey based his piece on a new and massive body of research by three economists who studied tax returns to find out exactly who the richest 1 percent of Americans are. They number about 140,000; they make at least $1.7 million a year; their share of the wealth has grown from 2.5 percent in the mid-1970s to more than 10 percent. But who are they? No one has known, until now.

The reason this research is groundbreaking and important: people who want to pooh-pooh the effects of inequality could say until now, “Oh, you’re talking about a few Wall Street types and a lot of athletes and movie stars.” As this sounds intuitively reasonable to most people, and as the majority of us don’t begrudge Tiger Woods and Tom Hanks their money, sentiments like this one tended to keep people from getting too worked up.

But athletes and “media figures” make up just 3 percent of the total, the researchers found. The overwhelming majority? Well, 41 percent are managers and executives at non-financial companies, and 18 percent are finance executives. Whoriskey opens his article by highlighting the history of Dean Foods, a dairy producer whose brands include Land O’Lakes. In the 1970s, the CEO of Dean’s predecessor corporation paid himself $1 million in today’s dollars, mostly in salary. The current head of the company has usually made around $10 million a year, enjoys four country club memberships, and the use of a private jet. Dean’s workers, meanwhile? They’ve fared the same as workers in most places during this period of excess in our history. Adjusted wages are stagnant and even down from the ’70s.

The Dean Foods story, Whoriskey writes, is pretty typical. The company grew, mergers happened, running it became more complex, and zoom: the board kept voting higher and higher compensation (and more complicated compensation) to the CEO. Why did this happen across various industries? This is still unexplored by social science, but it’s not clear to me that it’s a question social science can answer. The answer is that the ethos changed. By and large CEOs stopped thinking, as Dean’s 1970s CEO Kenneth Douglas did, that a human being only needed so much and after a certain point enough was enough. If industry X was doing it, then industry Y wanted to do it, too. Greed spread, and soon enough an entire economy arose devoted to goosing the greed, providing goods for the people making all this money -- the ever-more luxurious private jets, the Maybach cars (that’s an ultra-fancy Mercedes for those for whom a regular old Mercedes is too plebeian), the restaurants where you can drop $1,000 on dinner, and so on.

Now, what does all this have to do with Social Security? This: over the years, Social Security was structured so that the payroll taxes that fund it (13.4 percent of wages, half from the employee and half from the employer up to about $107,000 in salary, a figure that rises a bit each year) would be applied to 90 percent of total U.S. compensation. The actuaries calculated that hitting that 90 percent should keep the trust fund in pretty good shape.

Today, though, Social Security payroll taxes are collected on only about 82 to 84 percent of total compensation. The difference is immense. And why does the difference exist? Rampant inequality, and compensation arrangements at the top that give executives their pay in the form of capital gains and stock options and other income forms to which payroll taxes don’t apply. And, if middle-class incomes had grown respectably since they instead stagnated in the 1970s, we’d have millions more Americans making $60,000 instead $50,000 and $100,000 instead of $80,000, and the Social Security trust fund would have that much more money.

The short-term move would be to raise the Social Security payroll tax cap up to $180,000 (a hypothetical figure used by many economists), but even that wouldn’t completely solve the problem, especially as more boomers retire. But the long-term solution? Do something about inequality in this country. It’s a disgrace. Here we are, seemingly headed toward a future in which seniors of modest incomes are going to have to pay a lot more for their health care, and in which powerful forces seek to open up a discussion about Social Security that will inevitably lead to reduced benefits. God forbid we try supporting the program at the levels it ought to be supported.

God forbid also that a Democrat -- the president, let’s say -- make this argument and draw these connections for the American people. Those people say regularly in polls that our current inequality is indefensible. Unfortunately, it is defended, daily and with gusto, by the people and interests who like things the way they are. And almost no one in a position of power is forcefully defending the other view. Mr. President, Democrats: it would seem that now is the time.

http://www.thedailybeast.com/articles/2011/06/20/gap-between-rich-poor-how-it-s-bankrupting-social-security.html

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