Time to Recover Productivity Gains Our Bosses Have Expropriated for Decades

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New Jersey Gov. Chris Christie, trying to change the subject from his own shabby performance as governor, has called for $1 trillion in cuts to Social Security and Medicare over 10 years, claiming it’s time for a “grownup discussion” of the alleged funding crisis facing both critically important programs.

Actually, his claim that the programs are too expensive is childish and misleading. Yes there is a projected shortfall in funds to cover benefits for a looming wave of Baby Boomers in retirement, starting in 2033, assuming nothing is done by Congress to raise revenues, but actually fixing that problem is easy.

Here’s one proposal for solving the shortfall in the Social Security Trust Fund that was set up in 1983 to pre-fund the surge in benefits expected as the Baby Boomer generation retires, but which, because of stagnant wages, longer life expectancy, and a decade of no economic growth is going to be depleted prematurely: just raise the payroll tax that employers have to contribute to Social Security.

Studies have shown that just raising the FICA tax, historically paid 50% by workers and 50% by employers, by 1% each, would eliminate the Trust Fund shortfall completely. That’s $10 more on a $1000 weekly paycheck, $3 more on a $300 paycheck — a barely noticeable uptick in taxation to assure full benefits through one’s retired years.

This simple solution has been opposed, not so much by the public, but by corporate America, which doesn’t want to pay higher payroll taxes for its employees. Republicans, and some conservative Democrats who receive oodles of corporate campaign cash, listen to that kind of thing.

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But the truth is corporate America has been doing just fine. It’s just the American worker who’s been suffering. In fact, the reason workers have been suffering is that they have been getting short-changed their bosses.

Economists have been pointing out that where normally, productivity gains made through automation, which allow workers to produce more revenues and profits for employers, have funded gains in overall living standards. But since the 1970s, with the orchestrated weakening of labor unions, and the shift in taxes from the rich and corporations to the middle class, the benefits of increased worker productivity, instead of going to workers, or being shared by workers and management, have mostly been accruing to the owners, managers and the investor class, not to workers.

Between 1973 and 2011, for example, productivity per worker in the US grew by 80.4%, while the median compensation to workers, in constant dollars, only grew by 10.7%. That is to say that over the past 40 years, 90 cents of every dollar of increased profits from improved worker productivity has gone to the capitalists (owners and shareholders) while only ten cents has gone to the workers actually doing the producing.

Get that? We should all be 80.4% wealthier today in constant dollars than we were back in 1973, but we’re not. Only the rich are, which explains the current wealth gap.

If we can’t make the bosses pay more to their employees, the least we can do is make the them pay more into those workers’ Social Security fund. How to accomplish that? Just raise just the employer share of the payroll tax, say by 2 percentage points to 8.2% of payroll instead of the current 6.2%.

Trust Fund shortfall solved for as far out as the eye can see of the actuaries calculate.

While we’re at it, we should of course also get rid of that outrageous cap on the payroll tax, which currently applies only to the first $118,000 in annual wages, and not at all to income from investments. If we eliminated that cap, making all income subject to the FICA tax at 6.2% for employees and 8.2% for employers (the way it’s already done for the Medicare tax) and also taxed so-called “unearned income” from investments, we could substantially boost Social Security benefits for all Americans so that instead of just keeping beneficiaries from the poorhouse, we would allow everyone to retire without having to suffer a decline in their standard of living.

Then people in the US could, like their counterparts in more civilized nations like those in Europe and Scandinavia, look forward to old age instead of living in fear of what financial advisors call “outliving your benefits.”

By the way, I would not advocate raising the FICA tax for the self-employed, who already have to pay both the employer and employee share of the tax — a total of 12.4%. My argument there is that unlike in the case of workers on a job, the self-employed cannot steal the benefits of increased productivity from herself (for example when a freelancer buys and starts to write with a computer, the productivity gain goes to the writer). At the same time, the self-employed are already paying 12.4% of their net profits into FICA, double the rate of employees, so asking them to pay even more to match a combined higher tax for employees and employers would be extortionate.

I would propose that we go beyond this modest proposal, and raise the employer payroll tax even further, so that Social Security benefits could provide retirees and the disabled with a livable income, as is done in most of Europe and Scandinavia. Think that’s raising employer taxes too much? Here are some examples of employer taxes for social security programs in Europe: In Germany, the payroll tax for employer and employee is 9.35%; in Finland, employers pay the full tax which is %23% of wages. In France, it’s 13.4% for employees, 18.2% for employers.) If the companies in those countries can afford to do this, so can those in the US.

Consider that when it was designed, Social Security was meant to be only one leg of a three-legged retirement stool, with the other two legs being personal savings and a company pension.

Well, we all know that company pensions are vanishing, as employers, undeterred by a union movement that they have all but killed off through their lobbying and buying of politicians. So that “leg” is gone. And as for personal savings, the screws that have been put to wages and salaries over the past few decades have left most Americans living from paycheck to paycheck, unable to save. The average assets saved for retirement these days among people 60 or older is less than $25,000! So there goes that “leg” too.

Clearly, Social Security — the only retirement “leg” standing — has to be bolstered in the US if we don’t want our elderly and infirm living in cardboard boxes on the nation’s streets and heating grates in coming years (as some already are doing).

So here’s the answer: Raise the employer share of the FICA tax by at least 2%, eliminate the cap on income subject to FICA, and put a FICA tax on investment income (what the IRS appropriately calls “unearned income”).

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