Social Security Revenue Suffers from the Income Gap
Much has been said about the shortfall in income to the Social Security Trust Fund, and an increase in the amount of income taxed for Social Security has been suggested, but I have not seen any reference to the degree to which our increasing income inequalities are responsible.
To illustrate how this works, let us analyze two payrolls, and their respective payments to the annual Trust Fund income. The first payroll will show a small company of 300 employees with an income distribution heavily weighted to the executives, who may be managers and/or part owners, at the expense of the lower paid rank and file. The second payroll will use the same numbers of employees and the same total pay but have a more egalitarian income distribution such as was commonly seen a few decades ago.
|
Case#1 |
|
|
Pay Rate |
Total for Group |
SS base |
to Trust Fund |
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Top Executive @ |
$2,500,000 |
$2,500,000 |
$90,000 |
$11,520 |
|
|
|
|
|
|
|
|
|
|
|
|
4 |
Managers @ |
$500,000 |
$2,000,000 |
$90,000 |
$46,080 |
|
|
|
|
|
|
|
|
|
|
|
|
15 |
Supervisors @ |
$150,000 |
$2,250,000 |
$90,000 |
$172,800 |
|
|
|
|
|
|
|
|
|
|
|
|
40 |
Lead Workers @ |
$50,000 |
$2,000,000 |
$50,000 |
$256,000 |
|
|
|
|
|
|
|
|
|
|
|
|
240 |
Line Workers @ |
$20,000 |
$4,800,000 |
$20,000 |
$614,400 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
300 |
|
|
$13,550,000 |
|
$1,100,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case#2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Top Executive @ |
$580,000 |
$580,000 |
$90,000 |
$11,520 |
|
|
|
|
|
|
|
|
|
|
|
|
4 |
Managers @ |
250,000 |
$1,000,000 |
$90,000 |
$46,080 |
|
|
|
|
|
|
|
|
|
|
|
|
15 |
Supervisors @ |
110,000 |
$1,650,000 |
$90,000 |
$172,800 |
|
|
|
|
|
|
|
|
|
|
|
|
40 |
Lead Workers @ |
60,000 |
$2,400,000 |
$60,000 |
$307,200 |
|
|
|
|
|
|
|
|
|
|
|
|
240 |
Line Workers @ |
33,000 |
$7,920,000 |
$33,000 |
$1,013,760 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
300 |
|
|
$13,550,000 |
|
$1,551,360 |
|
We can see that the same payroll distributed to the same people in a more egalitarian way yields 41% more to the Social Security Trust Fund. The eventual cost in payments would increase slightly due to the higher base earned in the lower ranks, but due to the progressive schedule of payouts it should be much less than 41%.
In the first case, the highest salary is 125 times as much as the lowest; in the second case, the highest salary is just under 18 times as much as the lowest. While more responsibility deserves higher pay, we may still debate how many multiples are appropriate. I have not done the research on these relationships as compared to other times and places, but the spread has clearly been increasing and is greater than in other first world countries.
How did incomes drift into such a spread? I think the reduced income tax rates on higher salaries may have something to do with it. If our top executive had to give up half or 2/3 or more of that large salary in income tax, he or she might become more inclined to give up some of that salary in order to retain good workers in the lower pay brackets. Marginal income tax rates for very high salaries during the Eisenhower administration were 91%. And remember Henry Ford’s rationale to his fellow industrialists who were scandalized when he paid his workers an unheard-of $5.00 a day. He explained that he wanted his employees to be able to afford the cars they were building.
Wanda Williamson - Revised 2/24/2006