A new document from the federal government helps lay the groundwork for a likely plan to fix Social Security by filling the $20 trillion hole in its accounts.
The report, produced by the Government Accountability Office in response to a request from Democratic Sens. Bernie Sanders of Vermont and Sheldon Whitehouse of Rhode Island, is titled “Older Workers: Retirement Account Disparities Have Increased by Income and Persisted by Race Over Time.”
But nowhere in the document does the GAO suggest investing some of the $2 trillion Social Security trust fund in the stock market — something every other pension plan in the U.S. and around the world does. That simple move alone would have filled the $20 trillion hole, and then some, long ago.
Nor does the report mention actually imposing taxes on the vast pool of untaxed or undertaxed trillions quietly owned by the political donor class.
Instead, it argues that those who benefit from a current retirement system that is grossly unfair are “higher earners,” meaning those who work for a living and earn a couple hundred thousand dollars per year.
First, the GAO reports that higher earners are the main beneficiaries of “tax expenditures,” which is a term the political class uses for money that Uncle Sam could tax but doesn’t. Second, it notes the staggering fact that among Americans in their 50s and early 60s, only those in the highest-earning 20% have made any progress at all in saving for retirement during the last 15 years.
“Disparities between low-income and high-income older workers’ retirement accounts were greater in 2019 than in 2007,” the report says. Back in 2007, those in the top 20% of earners had median retirement-account balances just four times as big as those in the middle 20%, and by 2019, those balances were nine times as big. “Racial disparities also persisted over the period. … White households had about double the median balance as households of all other races,” it says.
Reports such as this one set the stage for what is politically the likeliest solution to the Social Security crisis: Raising taxes on retirement contributions, raising Social Security taxes and cutting benefits for higher earners.
A growing number of conservatives want to fix Social Security’s accounts by cutting benefits, although even they admit this is only remotely feasible if you cut those benefits only for the upper middle classes. “To get out of this mess, people like me are going to have to take a little less and pay a little more in,” Sen. Lindsey Graham, a Republican from South Carolina, said during a 2022 debate about the future of Social Security. This would continue the conversion of Social Security from a savings and pension plan to a welfare program — an idea laid out in more detail in a recent paper by Henry Ordower at Saint Louis University School of Law.
Meanwhile, a growing number of liberals and progressives want to do something similar for 401(k) plans, IRAs and the like, curtailing or ending the tax breaks for high earners. This was laid out not long ago in a widely read paper by Michael Doran at the University of Virginia School of Law titled “The Great American Retirement Fraud.”
Many would also end the income cap on Social Security contributions, requiring higher earners to pay full Federal Insurance Contributions Act taxes on earned incomes above the current threshold of $160,200 — but without increasing the benefits accrued. President Joe Biden, sticking to a campaign promise, wants to eliminate the cap on incomes over $400,000 for now and let inflation, by raising nominal incomes, do the rest over time.
Much of this campaign is helped politically by the use of the astonishingly obfuscatory phrase “millionaires and billionaires.” One might just as well talk about “hairdressers and war criminals” or “dog killers and doctors.” Millionaires and billionaires are two very different groups of people. Most millionaires — people with a net worth of over $1 million — are part of the middle class and work for a living. Someone in California or New York or Massachusetts can be a millionaire just by owning their own home, even if they are unemployed.
And anyone working for a salary in the U.S. is already heavily taxed, from 15.3% on their first dollar up to 37% of their income via FICA, plus state taxes of 5% to 10%, as well as property and other types of taxes. Counting FICA, federal, state and city taxes, someone earning $160,000 may, in many parts of the country, be paying a marginal tax rate nearing 50%. These are European-style taxes, but without the European-style welfare state.
It is true that workers with higher incomes get the most benefit from tax expenditures — also known as tax breaks — but that’s for a very obvious reason: They pay the most in taxes in the first place. According to the Internal Revenue Service’s own data, even after accounting for tax expenditures, those with the highest taxable incomes are paying a higher and higher share of total federal taxes. In 2001, the highest 1% of earners, as measured by taxable income, paid 33% of all federal income taxes. In 2020, they paid 42%. Meanwhile, the share of income taxes paid by the bottom 50% of earners in terms of taxable income has more than halved, from 4.9% to 2.3%.
Meanwhile, almost completely ignored are those who have $100 million or $1 billion in capital, whether in stocks or a private-equity fund. Astonishingly, they may be paying almost no taxes at all. One of the favorite dodges for converting capital to cash without having to pay Uncle Sam is simply to mortgage some of your wealth with a Wall Street bank. No stock is sold, so there are no capital gains to be taxed. But there is no income either, because the money borrowed is simply a loan. A perpetual loan, but a loan nonetheless.
Meanwhile, thanks to the carried-interest loophole — a tax dodge so egregious that when you explain it to laypeople they refuse to believe you — many of the people running hedge funds, venture-capital funds and private-equity funds pay heavily discounted tax rates, even if they are eventually forced to pay the taxman.
This is why the richest people in America effectively pay no tax, while “high-earning” worker bees have a target on their backs.
Federal data show that 0.1% of the U.S. population, about 130,000 households, own 13% of the country’s wealth, or $18 trillion. For those households, average net worth is $140 million, give or take.
The GAO’s report shows an astonishing and grotesque picture of America’s retirement savings. Since 2007, most of America’s older workers have been no better off than their predecessors. Members of Gen X, now nearing retirement, are mostly worse off than baby boomers were.
Over those 16 years, U.S. bonds have produced a 100% return, doubling your money — and that is after accounting for inflation. U.S. stocks, as measured by the S&P 500, have done even better, tripling your money, once again after accounting for inflation.
Yet during this time, the real, inflation-adjusted value of median retirement-account balances for most older Americans has gone down. The data make for dismal reading. The share of lower-income workers with any retirement-account balance at all halved, to 10%. The median balance for middle-income earners in their 50s and early 60s fell, in real, inflation-adjusted dollars, from around $87,000 to $64,000. Median balances for those with low incomes, including, for example, a disproportionate number of older people of color, are pitiful.
These figures show how little a decade or more of quantitative easing, or easy money by the Fed, has trickled down to workers.
And as for workers with higher incomes? Those in the top 20% have seen an 86% rise in the real, inflation-adjusted value of their median retirement-account balances. This means they have underperformed U.S. bonds and stocks, but nonetheless they have made substantial progress — as they should.
Does that make them ripe for the picking? Perhaps. According to the GAO, people in this category have a median annual income of $282,000. And their median retirement-account balance is a princely $600,000 —or, using the famous 4% rule, enough to generate an income in retirement of $24,000 a year, or $2,000 a month.