According to a Wall Street Journal analysis, the percentage of total wages and salaries paid to top executives rose from roughly 28 percent of the national total in 2002 to 33 percent in 2007, just five years later. (The figure excludes non-salary compensation, such as incentive stock options, which would tilt the ground even further.)
Now, that’s a pretty remarkable shift of earning power over a very short time, and as the Journal points out, it has serious implications for Social Security. That wage shift toward the already well-paid puts more of the nation’s paycheck out of reach of the payroll tax, which isn’t collected on salary and wages above the legal ceiling, which this year is $106,800. (In effect, the payroll tax operates as a surtax on the income of the working and middle classes, with much of the income of upper earners exempt.)
Because of that shift toward high earners, an additional $1 trillion in annual salary is now out of reach of the payroll tax, meaning the Social Security Trust Fund is projected to use up its surplus by 2037, four years earlier than expected.
I’d propose three basic ways to explain that sudden shift in earning power:
One, top executives and other well-paid employees became considerably more productive and worked even harder in that time frame, while the rest of the American work force slacked off. Thus, the shift is purely the product of personal merit and anybody who dares to even raise the issue is a socialist. (See comments below, no doubt). This is the merit-based, classic free-market explanation that pretends the market is an exacting judge of each person’s contribution to the overall good, and rewards each person appropriately.
Or two, for reasons ranging from technology to global trade, the overall economy is simply shifting in ways that reward the upper managerial class and penalize those who make their living in other ways. This global megatrend means that earning power is being transferred from one group to another regardless of the personal merit or hard work of those involved, and is totally impersonal in its operation.
Or, option three, those in the managerial and executive class control the compensation process and have tilted it in their own favor, skewing it to reward themselves and their peers at the expense of others. That doesn’t necessarily make them evil or even particularly greedy; given human nature, any group of people, granted such power without a countervailing power to offset it, would do the same thing over time and have no conscious sense of doing so. And in 21st century America, the forces that once discouraged such behavior — social and cultural norms, taxation policies, corporate bylaws, etc. — have weakened to the point of being ineffective.
Of course, no single explanation probably applies, and the real answer is a combination of the above. But we ought to talk about it as a nation, because the phenomenon is real, and the explanation we settle upon will determine what, if anything, should be done about it.