Wage Inequality Poses a Larger Economic Burden Than Prospective Social Security Tax Hikes

For Immediate Release: March 14, 2005

Contact: Debi Kar, 202-387-5080

Numerous politicians and commentators have claimed that the prospect of higher Social Security taxes in the future will threaten the living standards of our children and grandchildren. A new report by the Center for Economic and Policy Research (CEPR) economist Dean Baker, entitled "The Burden of Social Security Taxes and the Burden of Wage Inequality" shows that wage inequality poses a much larger economic burden on most workers than any tax hikes that may be needed to keep Social Security solvent. The tax increases that the Social Security trustees and the Congressional Budget Office project would be needed to maintain Social Security's solvency would have far less impact on the living standard of a typical worker than the rise in wage inequality the nation has experienced over the last quarter century.

A typical worker lost an amount equal to 9 percent of their wages due to the increase of wage inequality over the last decade. By contrast, the Social Security trustees and the Congressional Budget Office project the size of the tax increase needed to keep Social Security fully solvent over its 75-year planning period as 1.9 percent and 1.0 percent, respectively.

The amount of money that typical wage earners have lost in the last year alone, due to the upward redistribution of income, is comparable in size to the tax increases that would be needed to maintain Social Security’s solvency for the next seventy five years. If recent trends in inequality persist into the future, it will pose a much greater threat to the living standards of most young workers than the prospect of paying higher Social Security taxes to keep the program solvent. If wage gains are more or less evenly shared, then future generations of workers would experience large increases in living standards regardless of what happens to the Social Security tax rate.

Given the large amount of attention devoted to the prospect of a higher Social Security tax, it is striking that recent trends in wage inequality – which have a much larger impact on most workers’ welfare – have passed largely unnoticed.