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A record share of earnings was not subject to Social Security taxes in 2021: Inequality’s undermining of Social Security has accelerated

Social Security payroll taxes are not collected on earnings over a set cap. In 2021, this cap was $142,800, so workers making more than this enjoyed the…

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Social Security payroll taxes are not collected on earnings over a set cap. In 2021, this cap was $142,800, so workers making more than this enjoyed the benefit of zero Social Security taxes on all earnings in excess of this cap.

However, rising income inequality is skewing this tax structure even further to the benefit of top earners and diminishing funding for the crucial retirement program so many Americans rely on.

Social Security’s payroll tax—of which employees pay 6.2% and employers 6.2% each—has a cap that rises with growth in the national average wage index compiled by the Social Security Administration (SSA). In 2023, for example, the cap is set at $160,200. But since wage growth for top earners continues to outpace average wage growth, a growing share of total earnings is spilling over the cap and escaping taxation, eroding Social Security revenues.

Significant reforms to Social Security made in 1983 set the cap at a level so that 90% of all earnings would be subject to taxes. Over time, rising inequality meant that this share shrank as more earnings for higher-wage workers spilled over the cap. In 2020 and 2021, the share of earnings subject to Social Security taxes hit the lowest levels since before the 1983 reform. In fact, by 2021, the share of earnings subject to Social Security taxes was at the lowest level in nearly 50 years (since 1972).

This fact is important for at least two reasons:

  • First, Social Security is likely to be under threat in coming years as part of a general return to debates over long-run fiscal sustainability in the United States.
  • Second, a recent debate on earnings inequality trends has rightly highlighted a pronounced compression of wages among the bottom 90% of workers. But the Social Security data we highlight in this brief show that growth at the very top of the earnings distribution—the top 1% and above—continues to exceed growth of the bottom 99% of the workforce. This means there has been very little (or no) compression between earnings for the bottom 90% and those at the very top of the earnings distribution.
Earnings growth at the top in recent years

According to our latest research using SSA data, annual earnings rose fastest for the top 1% of earners (up 9.4%) and top 0.1% (up 18.5%), while those in the bottom 90% saw their real earnings fall 0.2% between 2020 and 2021. As wage growth over the cap continues to outpace average wage growth, a higher share earnings fall above the Social Security tax cap. This costs the Social Security system significant amounts of revenue relative to a scenario where wage growth was more equal and there was no growth in the share of overall earnings above the cap.

Figure A shows the share of aggregate earnings subject to the Social Security tax between 1950 and 2021. The share of earnings subject to Social Security taxes hit a record high of 90% in 1982 and 1983. This was an intentional choice made as part of a significant reform to Social Security meant to shore up its long-run actuarial balance. Because wage inequality was not visibly rising when these reforms were made, it is safe to assume that the reform was meant to set the earnings cap at 90% into the future. But this target has been undercut since by steadily rising wage inequality: In 2021, only 81.4% of all wage earnings were subject to Social Security taxes.

Figure A

Figure B tracks the share of earnings above the Social Security tax cap alongside the share of earnings accruing to the top 1% of wage earners. The share of earnings above the cap increases as the top 1% share of earnings rises.

Figure B
Figure B

The costs of letting the cap wither as wage inequality increases are enormous. What might look like small changes in the share of earnings covered by Social Security taxes (a percentage point or two) have large implications for the program’s revenues. Each one percentage point drop in the share of total earnings subject to Social Security taxes (moving from 82.4% to the current 81.4%, for example) reduces revenue by an additional $12.6 billion.

From 2019 to 2021, the share of earnings subject to the Social Security tax fell by 2.1 percentage points. On an earnings base of $10.2 trillion in 2021, this translates into roughly $26 billion in lost revenue to Social Security.

Figure C shows the annual revenue loss to Social Security stemming from earnings spilling over the cap since 1983, expressed as a share of total taxes collected through the Social Security payroll tax. By 2021, the leakage from revenues caused by growing inequality reached almost 11% of total taxes paid. This is equivalent in fiscal impact to an unlegislated 11% cut in the Social Security tax rate (or equivalent to a 1.1 percentage point cut from the 12.4% Social Security tax) by the end of this period. The implied cumulative loss since 1983 is enormous: The ongoing leakage out of Social Security’s revenue has led to a Social Security Trust Fund holding 50% fewer reserves in 2022 ($1.4 trillion fewer) than it would have if inequality had not increased (even before accounting for the larger interest income that a higher level of reserves would have been generating over this entire period).

Figure C
Figure C
Why this matters II: Telling a richer story of inequality trends

Recent research by Autor, Dube, and McGrew finds a pronounced degree of wage compression among the bottom 90% of workers in the pandemic labor market. That is, pay at the bottom has risen more rapidly than at the middle or the top. Our prior research also found similar patterns of low-wage workers experiencing disproportionate wage gains in the past two years—gains that even beat out high inflation for roughly the bottom third of workers.

Both of those findings rely on the Current Population Survey (CPS) to examine changes in hourly wages. However, the CPS makes it difficult—if not impossible—to examine what’s going on above the 90th percentile of the wage distribution. But the SSA data used in this piece allow us to look within the top 10%, specifically within the top 5% and even 1% of earnings. The SSA data measure annual earnings (hourly earnings cannot currently be calculated from the SSA public data). The SSA data also include some wage and salary income not captured by the CPS—stock options and bonus pay, most importantly. This SSA data tell us that while there has indeed been pronounced compression of hourly wages among the bottom 90% (and there’s even some speculative evidence of annual earnings compression within the bottom 90%), annual earnings for the top 5% and above continue to rise substantially faster than average growth. Annual earnings compression does not seem to be happening much between the top 5% and everybody else.

Another way to illustrate the role of rising wage inequality on the declining share of earnings subject to the Social Security tax is to look at the cumulative change in the earnings cap against the growth in average earnings of the top 5%. Because roughly 6% of workers have annual earnings that exceed the Social Security taxable maximum, growth in the top 5% relative to the earnings cap should be a good proxy for just how fast inequality is eroding Social Security revenue. Figure D below shows the growth rate of earnings for the top 5% and growth in the average earnings cap since 1979. The rise in inequality (i.e., faster growth among the top 5% relative to the average) is constant and has not slowed down in recent years.

Figure D
Figure D
Policy lessons

In the long run, stopping the growth of earnings inequality should be a key goal of policymakers. Given that this growth has been largely policy-driven, its reversal could also be secured by better policies (i.e., stronger labor standards, effective labor law reform that allows workers to more easily form unions, and macroeconomic policy that targets low unemployment rates over longer periods of time).

However, even with the growth of inequality as given, Social Security’s finances can be protected from erosion by simply changing how the earnings cap is set.

At a minimum, ensuring the cap is set at a level that restores 90% of earnings to being subject to Social Security taxes should be done. However, further reforms that remove the cap entirely, or even allow a greater range of income (investment income, for example) to be subject to Social Security taxation should be considered. What should not be allowed to continue is the status quo where rising earnings inequality steadily throttles revenue available to the Social Security system.

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Coinkite’s Newest Bitcoin Device Can Serve As A Lightning Wallet And Nostr Client

Satslink is a versatile and secure peer-to-peer device that empowers developers to explore a wide range of communications and mobile hardware applicat…

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October 14, 2023

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Satslink looks similar to the Coldcard Q1, but internally it's completely different.

Coinkite

Coinkite has announced their latest product, Satslink. The under-production device sits at the intersection of many different areas of communications and mobile hardware, empowering developers to build a whole slew of different applications.

Rather than leaning on an opinionated framework, Satslink leverages open and flexible hardware enclosed by the Coldcard Q1’s exterior to bring variety and flexibility to developers. Those in possession of this device can choose what to do with it, and let their builder mentalities run wild on the many different possibilities the piece of hardware can offer.

At its core, Satslink is a peer-to-peer, hackable multi-purpose device. It features a secure element, as typical of Coinkite products, allowing the user to securely store private keys within the device. While it shares the external design with the Coldcard Q1, the internals are totally different from the company’s latest hardware wallet. Instead of focusing on air gapped security, the Satslink aims to bring secure communications to the day to day in ways that few would’ve considered possible.

“Being dissatisfied with the connected and DIY options, we felt the need to create a better hot platform,” NVK, founder at Coinkite, told Bitcoin Magazine. “Bitcoin is expanding scripting/mpc options and we now have Nostr. Someone had to make a good connected and portable device for developers and enthusiast to create the next generation of freedom functionality.”

Satslink leverages ESP32-S3, a low-power MCU-based system on a chip (SoC) with integrated 2.4 GHz Wi-Fi and Bluetooth Low Energy (Bluetooth LE). It consists of high-performance dual-core microprocessor (Xtensa® 32-bit LX7), a low power coprocessor, a Wi-Fi baseband, a Bluetooth LE baseband, RF module, and numerous peripherals. Satslink is programmed in micropython, with its source fully-available, and it is completely field upgradable with no locked-down ROM areas. Coinkite’s product also features a MicroSD slot for data transfer.

Satslink seems to join together many different fields in bitcoin, technology and communications.

Coinkite

“The initial target is developers and enthusiasts,” NVK said. “But, because of the consumer friendly form factor, they will be able to start using anything the community creates. Like hot and sovereign lightning wallets and Nostr clients!”

Nostr, the open communications protocol that went viral after Block CEO and Twitter founder Jack Dorsey started endorsing and funding the project, is top of the list of possible use cases for Satslink. Given its peer-to-peer communication capabilities, Satslink can be used as a Nostr client, and since it can also work as a relay, one could send and receive messages as Nostr posts without those ever hitting the internet. Imagine a localized Nostr made up of many Satslink devices talking to each other through a sort of mesh network instead of the open web. That could be possible with this device.

Another interesting use case that many bitcoiners could relate to is having a sovereign controller for their home-based bitcoin stack. As some bitcoiners run bitcoin nodes and sometimes even self-hosted servers at home, one could program the Satslink to connect to their home stack on demand and perform desired actions remotely and securely given its networking capabilities. Satslink could be used to run a transaction coordinator, for instance, or be used as a whole wallet –– though Coinkite doesn’t recommend using the Satslink as your go-to cold storage solution for large bitcoin amounts.

Satslink’s communication features also boast NFC and a QR code reader, enabling even more use cases for its eventual users. Notably, this combination paired with Satslink’s versatility and programmability could even be used to turn it into a hardware wallet of another manufacturer. Whether that’s desirable or not, truth is it could be possible to turn a Satslink into Blockstream’s JADE wallet or other similar DIY hardware wallets.

While the possibilities are endless, what users actually build with this product remains to be seen. Coinkite’s device is currently available to preorder on the company’s website at a $189 price tag, and it is still unclear when the product will start shipping to buyers.

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Week Ahead: NIFTY Consolidates While Defending Key Levels; Vigilant Protection Of Profits Advised

In the previous technical note, it was mentioned that the volatility gauge INDIAVIX stays at its lowest levels and this setup keeps the markets vulnerable…

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October 14, 2023

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In the previous technical note, it was mentioned that the volatility gauge INDIAVIX stays at its lowest levels and this setup keeps the markets vulnerable to profit-taking bouts from the current levels. Over the past five days, the markets showed some signs of profit-taking, but at the same time, they largely consolidated and traded in a range. The trading range stayed modest at 362 points as the index oscillated within this range. The global equities remained largely stable, but some stress stayed visible. Overall, the markets continued to consolidate while defending important support levels; the headline index closed with a net gain of 97.55 points (+0.50%) on a weekly basis.

From a technical perspective, in the week before this one, the NIFTY had tested the 20-week MA and had taken support by rebounding from that point. The 20-week MA which currently stays at 19387 remains an important support for the markets on a closing basis. The markets will consolidate so long as they keep their head above this point; any violation of this level will make the markets incrementally weaker. The volatility gauge, INDIAVIX, showed a marginal increase of 3.08% to 10.62 on a weekly basis. It remains within a striking distance of 10.14, the lowest level seen on this indicator so far. This remains a point of concern as this keeps the markets exposed to profit-taking bouts as mentioned earlier.

Monday is likely to see a tepid start to the week; the levels of 19880 and 19950 are expected to act as potential resistance points. The supports come in at 19500 and 19380 levels.

The weekly RSI is 62.33; it stays neutral and does not show any divergence against the price. The weekly MACD is bearish and trades below its signal line. A bullish engulfing candle has emerged; however, it is of little significance as it has emerged with an overall uptrend after just a minor decline.

The pattern analysis of the weekly charts shows that the markets are unlikely to see any runaway up move; any extension of the move on the higher side will find resistance to the upward-rising trend line which begins from 18900 and joins subsequent higher tops. On the lower side, the NIFTY has important support at 20-week MA currently placed at 19387. So long as this is protected, the index will consolidate in a defined range and shall get incrementally weaker if this important support level is violated on a closing basis.

All and all, it is the time when we get cautious about the markets. Even if the move gets extended over the coming days, it would be prudent to use such moves on the upside to vigilantly protect profits at higher levels. Fresh purchases should be kept highly selective and within defensive and low-beta pockets. While keeping overall exposures at modest levels, a cautious outlook is advised over the coming week.

Sector Analysis for the coming week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

Relative Rotation Graphs (RRG) show that the Nifty Pharma Index which was inside the leading quadrant until now has rolled inside the weakening quadrant. Besides this, the IT, Energy, Midcap100, Media, Metal, PSE, PSU Bank, and Infrastructure indices are also inside the leading quadrant. Out of these groups, except PSE, PSU Bank, and the Infrastructure index, all others are showing a slowdown and paring of their relative momentum against the broader markets.

Along with the Pharma index, the Realty, and the Auto Index are also inside the weakening quadrant. However, both of these indices are showing improvement in their relative momentum.

Nifty Bank and Financial Services index are seen languishing inside the lagging quadrant. The FMCG and the Consumption index are also inside the lagging quadrant, but they are seen improving their relative momentum against the broader Nifty 500 index.

The Nifty Commodities index and Services Sector index are inside the improving quadrant.

Important Note: RRG™ charts show the relative strength and momentum of a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.  

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst

www.EquityResearch.asia | www.ChartWizard.ae

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Ethereum losing streak vs. Bitcoin hits 15 months — Can ETH price reverse course?

Bitcoin ETF and halving buzz have boosted BTC’s demand compared to Ethereum in recent weeks.
The price of Ethereum’s native token,…

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October 14, 2023

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Bitcoin ETF and halving buzz have boosted BTC's demand compared to Ethereum in recent weeks.

The price of Ethereum's native token, Ether (ETH), is trading around a 15-month low versus Bitcoin (BTC), and the lowest since Ethereum switched to proof-of-stake (PoS).

Will it continue to weaken for the remainder of 2023? Let's take a closer look at the charts. 

Ethereum price breaks below critical support vs. Bitcoin

The ETH/BTC pair dropped to as low as 0.056 BTC earlier this week. In doing so, the pair broke below its 200-week exponential moving average (200-week EMA; the blue wave) near 0.058 BTC, raising downside risks further into 2023.

The 200-week EMA has historically served as a reliable support level for ETH/BTC bulls. For instance, the pair rebounded 75% three months after testing the wave support in July 2022. Conversely, it dropped over 25% after losing the same support in October 2020.

ETH/BTC weekly price chart. Source: TradingView

ETH/BTC stares at similar selloff risks in 2023 after losing its 200-week EMA as support. In this case, the next downside target looks to be around its 0.5 Fib line near 0.051 BTC in 2023, down about 9.5% from current price levels.

Conversely, ETH price may rebound toward its 50-week EMA (the red wave) near 0.065 BTC if it reclaims the 200-week EMA as support.

Bitcoin bull case overshadows Ethereum

Ethereum's persistent weakness versus Bitcoin is reflected in institutional capital flow data. 

For instance, as of Oct. 6, Bitcoin-specific investment funds had attracted $246 million year-to-date (YTD), according to CoinShares. On the other hand, Ethereum funds have lost capital, witnessing outflows worth $104 million in the same period.

Net flows into crypto funds (by asset). Source: CoinShares

The discrepancy is likely due to growing buzz about a potential spot Bitcoin exchange-traded product (ETF) approval in the U.S.

Trade pundits argue that a spot Bitcoin ETF launch will attract $600 billion. In addition, Bitcoin's fourth halving on April 24, 2024, is also acting as a tailwind versus the altcoin market.

Related: Bitcoin price gets new $25K target as SEC decision day boosts GBTC

The halving will reduce the Bitcoin miners' block reward from 6.25 BTC to 3.125 BTC, a bullish case based on historical precedent that cuts new supply in half. 

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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