An unanticipated change

Greenspan's calculations were based on the presumption that income distribution in the United States would remain reasonable -- just as it had since America learned the lessons of how extraordinary disparities in income distribution lead to extraordinarily unfortunate economic events like the Great Depression.

How could Greenspan and his crew possibly have predicted that -- at the very time he was making his calculations regarding the future solvency of Social Security -- the nation was about to undergo a massive case of amnesia whereby the lessons of the Depression would be completely forgotten and greed at the top would return to, once again, trump sensible economic policy?

So, how does our record income inequality play into our Social Security problem?

According to Josh Bivens, acting Research & Policy Director at the Economic Policy Institute:

"Sixty percent of the current shortfall would be eliminated by a reversal of two adverse economic trends that have emerged since 1983: sluggish growth in average (real) wages and erosion of the tax base due to rapid growth in the inequality of earnings."

It's not particularly difficult to follow what Bivens is talking about.

Social Security is funded by the contributions you and your employer make by way of FICA taxes. When the Greenspan Commission recommended its modifications in 1983, the intention was that base from which earnings would be taxed would include 90% of the total income among the nation's wage earners. To insure that the Social Security taxes would not exceed the tax base intended, a cap was imposed so that once an earner reached the cap in a given year, that wage earner would no longer pay the Social Security tax on any earnings exceeding the cap.

The rate employees currently pay into Social Security is 6.2% on wages earned, up to a cap of $110,100 (reduced a bit for the years 2011 and 2012 due to the temporary tax holiday).

Thus, once a wage earner's income exceeds the $110,100 in a given year, that earner stops contributing to the Social Security fund. Therefore, it stands to reason that if more income is funneled up to those making more than $110,100, at the expense of those earning below the cap, less money is available to be paid into the Social Security fund.

That is precisely what has been happening.

The result of the nation's growing income disparity has altered the Greenspan expectation that 90% of income would stand as the tax base for Social Security contributions to our current circumstance whereby only 83% (or less) of income is being taxed for the Social Security fund as more money flows into the pockets of those earning more than the cap.

This from the Congressional Research Service:

"Since the 1980s, the share of covered workers below the taxable earnings base has remained relatively stable at roughly 94%. However, the share of covered earnings that are taxed has fallen from 90% of all earnings in 1982 to 83% in 2007. The large declines in the late 1990s were mainly because salaries for top earners grew faster than the pay of workers below the cap."

What we see is yet another example of how the long-running stagnation in workers' wages has wrought real damage on even-unexpected elements of the American economy. It is not only a matter of workers having less money at their disposal to support our consumer-driven economy. We now see that stagnant wages have reduced the contribution levels going into the Social Security Trust as upper-level earners avoid the tax on a huge portion of their income.

I should point out that this result of crushing income inequality does not have the same effect on Medicare due to the fact that the tax we pay toward Medicare applies to all earnings with no caps. Thus, a dollar of income is being taxed for Medicare no matter whose pocket has possession of that dollar.

So, what do we do about this?

One would hope that at some point in our imaginary future, employers will recall the lessons of the past and see the folly of putting too much of the income into the bank accounts of only the top earners. But if that is not in the cards, and I doubt that it is, the time may have arrived to remove the caps on Social Security contributions in order to raise the tax base to the level that was intended.

The Congress of 1983 -- a Republican-controlled Senate and Democratic House -- would have understood this and made the necessary adjustments.

Can we expect the same from the 2013 version of Congress?

I don't know about you, but I do not plan on holding my breath.

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