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April 12, 2005
Inequality and Social Security
A nice article on the topic from Greg Ip appears in yesterday's Wall Street Journal (page A2 in the print edition).
The debate over Social Security has managed to drown out other longstanding issues in American society, including the widening gap between rich and poor and surging health-care costs. Yet these two phenomena play an important, though little appreciated, role in Social Security's problems. That is because they are eroding the base of taxable wages available to support Social Security benefits.
The reason is that taxable payroll is expected to expand more slowly than is GDP and, by 2080, to equal just 33% of GDP, compared with 38% now. Stephen Goss, Social Security's chief actuary, says there are two main reasons why. One is that a "somewhat increasing share of all the earnings in the economy [is] above our taxable maximum," and the second is that a growing share of "employee compensation...is going not to wages but to fringe benefits, which are not included in our tax base," Mr. Goss says.
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. In the past 25 years, a growing share of income has been paid to people who earn more than the cap.
This increasing concentration of income at the upper strata of society is an important reason why, from 1980 through 2000, taxable payroll fell to 83% of wages of contributing workers from 90%...
Even if inequality stopped widening, Social Security's tax base probably would continue to be eroded because of rising health-care costs. Since 1996, health-care costs have risen to 7.3% of employee compensation from 6.3%, and Social Security's actuaries expect it to keep rising. This is a big problem for Medicare, the federal health program for the elderly, but it also affects Social Security, because payroll taxes aren't levied on health-care insurance premiums. Mr. Goss says that is the main reason for taxable payroll's shrinking share of GDP.
Wholesale prices for popular brand-name prescription drugs rose an average 7.1% in 2004, more than twice the general inflation rate, a new study commissioned by the nation's largest seniors lobby says.
The increase is the biggest in the five years that AARP, with 35 million members, has sponsored the study. It's just slightly higher than the 7% price rise in 2003.
... although the results are, apparently, under some dispute:
Ken Johnson of Pharmaceutical Research and Manufacturers of America, the trade group of brand-name drugmakers, called the study "exaggerated and misleading." He said the use of wholesale prices excludes factors such as rebates that could cut retail costs.
"Price data clearly shows prescription-drug prices have increased about 4% a year," Johnson said. He called that in line with growth in other health costs.
That observation, of course, doesn't diminish Ip's point.
As if to underscore the point, there was this report from this morning's USA Today...
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