I am testifying in support of SB 15, which would gradually raise the Delaware minimum wage from the current $9.25 per hour to $15 per hour by 2025. In my testimony I will discuss why $15 in 2025 is an appropriate level for Delaware’s minimum wage and the impact it will have on the state’s low-wage workforce. I will briefly summarize what economic research tells us about how higher minimum wages affect workers, employers, and the broader economy. Finally, I will discuss why now is a good time to raise the state’s minimum wage, particularly as an end to the COVID-19 pandemic may be on the horizon.

Background and appropriateness of a Delaware minimum wage of $15 in 2025

Figure A shows the nominal and real (inflation-adjusted) values of the prevailing minimum wage in Delaware since the late 1930s. From the late 1940s until the late 1960s, the federal minimum wage—which covered workers in Delaware—was raised regularly, at a pace that roughly matched growth in average U.S. labor productivity. The federal minimum wage reached an inflation-adjusted peak value in 1968 of $10.66 per hour in 2021 dollars.1 In the decades that followed, Congress made infrequent and inadequate adjustments to the federal minimum wage that never undid the erosion in value that occurred due to inflation in the 1970s and 1980s.

Figure A

Beginning in 1999, Delaware lawmakers did step in to raise wages for the state’s lowest-paid workers, raising the state’s minimum wage modestly above the federal minimum for about a decade. The state reverted to the federal minimum from 2009 to 2014. Beginning in 2015, Delaware’s minimum wage was again raised above the federal minimum in stages until it reached the $9.25 value it has had since 2020. While this is certainly an improvement over federal policy, the state’s current minimum wage is still 13.2% lower than the minimum wage that applied in the late 1960s.

Allowing workers today to be paid less than their counterparts a generation ago makes no sense for the well-being of Delaware’s workforce or the state economy, and there is no economic justification for it. Over the past 50 years, the country has experienced enormous growth, and the economy’s capacity to deliver higher wages—through improvements in productivity—has more than doubled, growing by 109% since 1968. The top line in Figure A shows that, had the minimum wage kept pace with productivity growth since 1968, it would have reached $22.29 per hour by 2021, and would likely be nearly $24 by 2025.

Raising the Delaware minimum wage to $15 by 2025, as proposed in SB 15, would help correct policymakers’ failure to raise minimum wages more appropriately over the past five decades. Figure A shows that a minimum wage of $15 in 2025 would be the equivalent of $13.72 in today’s dollars, based on the Congressional Budget Office’s projections for inflation.2 This would finally grant Delaware’s low-wage workers a share of the country’s productivity gains over the past generation, with a wage 28% higher (adjusted for inflation) than the 1968 minimum wage. Again, it is important to recognize that since 1968, the economy’s capacity to deliver higher wages and living standards will have grown by 122% by 2025. Thus, raising the minimum wage 28% above the previous high point is meaningful, but it is still less than one-quarter of the economy’s productivity improvements of the past 50 years.

Table 1

Effects on the Delaware workforce

In 2025, with the final increase to $15, SB 15 would raise the wages of an estimated 122,000 Delaware workers, or roughly 28% of the state’s wage-earning workforce. As shown in Table 1, this includes 92,000 workers who would be directly affected—meaning that they would otherwise be paid less than $15 in 2025—as well as 30,000 indirectly affected workers who would otherwise be earning just above $15. They are likely to receive a pay boost as employers raise wages to recruit and retain them under the new higher wage standard.

Table 2

SB 15 would provide a substantial earnings boost to Delaware’s lowest-paid workers. As shown in Table 2, EPI’s model estimates that affected workers would receive a total of $314 million in additional wages through 2025. The average affected worker who works year round would see their real (inflation-adjusted) annual earnings rise by $2,800—a nearly 13% real pay increase. Among the directly affected workforce—i.e., those who would otherwise be paid less than $15—the policy change would lift pay by an average of 18% or about $3,600 in annual earnings for year-round workers. For someone making only $20,000 a year, that is a substantial increase in their spending power.

Table 3

Raising the Delaware minimum wage to $15 would also help combat gender and racial inequities, with disproportionate impacts on women and workers of color. As shown in Table 3, of the 122,000 workers likely to get a raise, 71,100 (58%) are women. Nearly one in three women workers (32%) in Delaware would get a raise from SB 15. Similarly, 51% of the affected workforce are people of color. In fact, nearly 40% of Black workers in Delaware would get a raise and almost half (47%) of Hispanic workers would get a raise.

Notably, a $15 minimum wage would primarily benefit adults in the prime career-building years, many of whom are supporting families. There is sometimes a perception that the workers who would benefit from a higher minimum wage are mostly teenagers in their first jobs. This is not true. In fact, the data show that most of the workers who would benefit from a $15 minimum wage are older and full-time workers. Table 3 shows that only 14% of affected workers in Delaware are teenagers while 63% are 25 years old or older. The average age of affected workers is 35 years old. Fifty percent of affected workers work 35 hours per week or more, and more than a quarter have children. In fact, raising the state minimum wage to $15 would provide a raise to 40% of all working single parents in Delaware.

Table 3 also shows that most workers who would receive a raise come from families with limited means. Nearly half (49%) of affected workers are in families with total annual incomes less than $50,000. For these families, every additional dollar they receive has a meaningful impact on their ability to make ends meet.

Using the federal government’s poverty guidelines, the data show that over 52,000 workers who would benefit from SB15 are either in poverty or close to it. In fact, raising the state minimum wage to $15 by 2025 would provide a raise to 82% of all working people in Delaware currently in poverty.

What the research shows about effects on employment

Whenever any minimum wage increase is proposed, concerns are always raised about the impact such a policy change might have on employment.3 By raising the cost of labor, do minimum wage increases cause businesses to employ significantly fewer workers, threatening the incomes of the low-wage workforce the measures are intended to help? This is one of the most heavily studied topics in economics, and the resounding conclusion of empirical research over the past several decades is a clear “no.” In a comprehensive review of nearly all published minimum wage research over the past 30 years, University of Massachusetts Amherst Professor Arindrajit Dube concludes that “the overall body of evidence suggests a rather muted effect of minimum wages to date on employment.”4 The median effect across studies in Dube’s review was that for every 10% increase in wages of low-wage workers, employment declined by 0.4%—essentially zero.

Importantly, even research on the highest minimum wages enacted at state or local levels has shown that there does not appear to be any sizable effect on jobs. In a paper published in the Quarterly Journal of Economics, Doruk Cengiz and co-authors examined the effects of 138 state minimum wage changes that occurred in the United States between 1979 and 2014.5 They found that even with minimum wages rising as high as 55% of the median wage—roughly the same as is being proposed for Delaware—there was no evidence of any reduction in the total number of jobs for low-wage workers. Harvard and U.C. Berkeley researchers Ellora Derenoncourt and Claire Montialoux demonstrated that highest national minimum wage we’ve had—in 1968, the equivalent of $10.66 per hour in 2021 dollars—also raised wages and significantly reduced Black–white earnings inequality without employment losses.6 Using data from low-wage counties, where minimum wage increases have raised labor costs much more than in high-wage labor markets, U.C. Berkeley researchers Anna Godøy and Michael Reich found that the policies significantly reduced poverty and had essentially no employment impact.7 And in a paper just recently published in the Journal of Economic Perspectives, Arindrajit Dube and Attila Lindner found that 21 city-level minimum wage increases raised wages in those cities with little effect on the number of low-wage jobs.8

Effects on businesses and the broader economy

There are several reasons why higher minimum wages have never meaningfully manifested the negative job impacts predicted by textbook models. Research has shown that when minimum wages are raised, businesses are typically able to adjust through variety of channels.9 These include:

• reductions in turnover and increased job tenure, which can reduce business costs of recruitment, hiring, and training;
• increases in productivity, as a result of increased work effort by employees, raised expectations by managers, or new efficiencies identified by businesses;
• wage compression—i.e., raises for higher-paid workers may be delayed or reduced;
• increased consumer demand, generated by the increased spending power of low-wage workers across the affected region; and
• modest price increases, on the scale of 0.4–1.1% per 10% increase in the minimum wage.10 These increases can be more easily absorbed as a result of concurrent boost in pay to a large portion of the region’s workforce, combined with the fact that all area businesses will be facing similar increases in labor costs—i.e., no single business will be at a competitive disadvantage if they all must raise prices.

Research by my colleague Elise Gould has shown that in recent years, as numerous states have enacted higher minimum wages, there has been a clear pattern of low-wage workers in those states seeing faster wage growth than their counterparts in states that did not raise their minimum wages.11 Figure B shows that in the states that raised their minimum wage between 2013 and 2018, wages among low-wage workers grew 5 percentage points faster than in states that did not change their minimum wage. Among low-wage women workers, these effects were even more pronounced: Wage growth was twice as strong for women at the bottom of the wage scale in states that raised their minimum wages versus in states that did not.

”Figure

Too often discussions on the minimum wage focus narrowly on these questions of potential employment effects, but this is a deeply flawed way of evaluating the merits of the policy. Research has shown that—regardless of any employment effects—higher minimum wages have led to clear, sizable welfare improvements for workers, their families, and their communities that far outweigh any potential costs of the policy. For example, in an article published in the American Economic Journal: Applied Economics, Arindrajit Dube demonstrates that the income-boosting effects of higher minimum wages significantly reduces the number of families below the poverty line.12 Similarly, Kevin Rinz and John Voorheis—researchers at the U.S. Census Bureau—have shown that not only do higher minimum wages lead to increases in income for low-income families, but that those income gains actually accelerate in the years after the minimum wage is raised.13 Higher minimum wages have been shown to reduce rates of smoking and are associated with a slate of other improved measures of public health.14 Researchers at Rutgers University and Clemson University also find that higher minimum wages reduce recidivism and may reduce property crimes.15 This policy has been shown to achieve broad public good that should not be overlooked or obscured by claims by opponents that raising the minimum wage would lead to economic devastation that has never manifest with any previous minimum wage increase.

Why now is a good time to enact this policy change

The COVID-19 pandemic has been devasting for workers, families, and businesses throughout the country, and recovering from the pandemic’s harm—both economic and otherwise—will take time. Fortunately, raising the minimum wage is a good way to heal some of the economic harm and expedite the recovery.

The immediate benefits of a minimum wage increase are in the earnings boost for the lowest-paid workers—increases in spending power that also deliver broader benefits to the economy. Extra dollars in the pockets of working families throughout the state would help by boosting aggregate demand. Economists generally recognize that low-wage workers are more likely than any other income group to spend any extra earnings immediately on previously unaffordable basic needs or services. Indeed, researchers at the Federal Reserve Bank of Boston find that minimum wage increases are associated with higher consumer spending, particularly in places with higher concentrations of low-wage workers.16

With vaccinations accelerating and a possible end to the pandemic in sight, it is an ideal time to inject more money into the pockets of workers and families who will go out and quickly spend those dollars. The best way for businesses throughout Delaware and the rest of the country to recover from the pandemic is by bolstering strong consumer demand.

A higher minimum wage would also more appropriately compensate many of the workers who have shouldered tremendous risk throughout the pandemic. EPI’s research on the effects of a federal $15 minimum wage by 2025 shows that the majority of workers who would benefit are essential or front-line workers.17 Because the composition of workers who would benefit in Delaware is similar to the national estimates, it’s safe to assume that essential and front-line workers likely constitute the majority of those who would benefit in Delaware. During the COVID-19 pandemic, these workers have kept the economy running at great risk to their health and their families, and very few of them have received hazard pay to compensate for their now-more-dangerous work. Raising their pay through a minimum wage hike is a good way to recognize the critical roles they have in the economic health of every community.

Conclusion

Given improvements in productivity, low-wage workers in Delaware and throughout the United States could be earning significantly higher wages today had lawmakers made different choices over the past 50 years. As such, the question for policymakers today should not be whether we can have significantly higher minimum wages, but rather, in what time frame we can achieve such levels.

Raising the Delaware minimum wage to $15 an hour by 2025 would finally raise the state’s wage floor to a purchasing power above the previous high point set in the late 1960s. It would raise pay for over 122,000 workers in the state, with particular benefit for women and workers of color. It would also more appropriately reward the essential and front-line workers who have kept the economy going during the pandemic, and would bolster consumer spending as the state and country recover.

Research has shown that past minimum wage increases have achieved their intended effects, raising pay for low-wage workers with little to no negative impact on employment. Moreover, research that has looked beyond the narrow question of employment impacts has found clear, meaningful benefits from higher minimum wages to low-wage workers, their families, and their broader communities.

I strongly encourage the committee and the full Delaware legislature to pass SB 15 and help strengthen the future for Delaware’s lowest-paid workers, their families, and their communities.

Notes

1. Inflation adjustment uses the Consumer Price Index for all Urban Consumers, Research Series (CPI-U-RS). See Bureau of Labor Statistics, “CPI Research Series Using Current Methods,” updated March 2021.

2. Projected inflation is from the CPI-U series published by the Congressional Budget Office. See Congressional Budget Office, The Budget and Economic Outlook: 2021 to 2031, “10-Year Economic Projections” (downloadable Excel file supplement), February 2021.

3. See National Employment Law Project, Consider the Source: 100 Years of Broken-Record Opposition to the Minimum Wage, March 2013.

4. Arindrajit Dube, Impacts of Minimum Wages: Review of the International Evidence, report prepared for Her Majesty’s Treasury (UK), November 2019.

5. Doruk Cengiz et al., “The Effect of Minimum Wages on Low-Wage Jobs,” The Quarterly Journal of Economics 134, no. 3 (2019).

6. Ellora Derenoncourt and Claire Montialoux, “Minimum Wages and Racial Inequality,” Quarterly Journal of Economics 136, no. 1 (February 2021).

7. Anna Godøy and Michael Reich, “Are Minimum Wage Effects Greater in Low-Wage Areas?” Industrial Relations, January 2021.

8. Arindrajit Dube and Attila Lindner, “City Limits: What Do Local-Area Minimum Wages Do?,” Journal of Economic Perspectives 35, no. 1 (2021).

9. For greater detail, see John Schmitt, Why Does the Minimum Wage Have No Discernible Effect on Employment?, Center for Economic and Policy Research Briefing Paper, February 2013.

10. See Sylvia Allegretto and Michael Reich, “Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-Based Restaurant Menus,” ILR Review 71, no. 1 (January 2018): 35–63.

11. Elise Gould, State of Working America 2018: Wage Inequality Marches On—and Is Even Threatening Data Reliability, Economic Policy Institute, February 2019.

12. Arindrajit Dube, “Minimum Wages and the Distribution of Family Incomes,” American Economic Journal: Applied Economics 11, no. 4 (2019): 268–304.

13. Kevin Rinz and John Voorheis, “The Distributional Effects of Minimum Wages: Evidence from Linked Survey and Administrative Data,” Working Paper 2018-02, Center for Administrative Records Research and Applications, U.S. Census Bureau, March 2018.

14. J. Paul Leigh, Wesley Leigh, and Juan Du, “Minimum Wages and Public Health: A Literature Review,” February 27, 2018.

15. Amanda Agan and Michael Makowsky, “The Minimum Wage, EITC, and Criminal Recidivism,” September 25, 2018.

16. Daniel Cooper, María José Luengo-Prado, and Jonathan A. Parker, “The Local Aggregate Effects of Minimum Wage Increases,” Journal of Money, Credit, and Banking 52 (December 2019): 5–35.

17. David Cooper, Zane Mokhiber, and Ben Zipperer, Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers, Economic Policy Institute, March 2021.

I am testifying today in support of H. 1609 and S. 1092, which would update a grossly outdated provision in Massachusetts’s wage and hour laws that exempts many lower-paid managers and administrative workers from overtime pay when they work more than 40 hours per week. In my testimony, I will first describe the significance and purpose of overtime protections, briefly discuss the historical background for the salary threshold for overtime exemption and federal efforts to update this standard, and then describe the likely micro and macroeconomic impacts of the proposed policy change here in Massachusetts.

The significance and purpose of overtime protections

 The Fair Labor Standards Act (FLSA)—enacted in 1938—requires employers to pay their employees at least the federal minimum wage for all hours worked, and caps at 40 the number of hours an employee can work in a workweek without additional compensation. The FLSA created the 40-hour workweek in America by requiring that employers pay an “overtime” premium of 1.5 times an employee’s regular rate of pay for all hours worked beyond 40 hours. (Prior to the FLSA’s passage, it was not uncommon for workers to work six days a week.) Overtime protections ensure that employers have “skin in the game” when they ask employees to work long hours, by making it more expensive to insist upon excessive hours of work.

From the beginning, the law applied to salaried employees as well as hourly workers. Congress recognized at the outset that there’s no inherent difference between an hourly worker and a salaried worker. How they are paid is entirely up to the boss. And salaried employees need time with their families and time for themselves just as much as hourly workers do. Congress ensured that hourly workers and salaried workers alike were entitled to overtime pay, whether they were blue collar or white collar, whether they worked in a factory or in an office.

In the FLSA, Congress provided overtime protections to most workers, and directed the Secretary of Labor to exempt bona fide executive, administrative, and professional employees from these protections—under what’s known as the “EAP” exemption.1 With the EAP exemption, Congress intended to exempt highly paid employees who were thought to have enough individual bargaining power in the labor market and workplace that they did not need to be protected from exploitation. A simple, straightforward indication of this higher bargaining power was their higher levels of pay.2

For an employee to qualify for the EAP exemption from overtime under both the FLSA and Massachusetts state law, they must satisfy each of three conditions: 1) they must earn a salary, i.e. not be paid by the hour; 2) they must earn above a certain salary threshold (the “salary test”); and 3) they must pass the “duties test,” a fairly complicated test of the employee’s tasks and responsibilities that establishes them as a bona fide executive, manager, or highly trained professional. Thus, if a salaried employee is paid less than the salary threshold, the employee is eligible for overtime regardless of job responsibilities. If the employee is paid at or above that salary threshold, he or she must also pass the duties test to be exempt from overtime requirements.3

Originally, the FLSA set the salary threshold at three times the minimum wage. In doing so, the law set a bright line demarcating which workers could be considered highly paid executives, administrators, and professionals, and which could not—regardless of their job duties. Similarly, the Massachusetts overtime law set the state salary threshold at two times the state minimum wage when it was enacted in 1960.

Figure A

For nearly 40 years after the FLSA’s passage, the federal salary threshold was regularly raised to ensure it still accurately delimited true executives, administrators, and professionals from workers with less bargaining power. As shown in Figure A, in 1975, nearly 63 percent of all salaried workers in the United States were automatically eligible for overtime because their salaries were below the salary threshold—i.e., they were eligible regardless of their job duties. Unfortunately, in the years that followed, the U.S. Department of Labor stopped updating the salary threshold, allowing overtime coverage to decline precipitously as nominal salaries rose over time. The threshold was updated modestly once in 2004, when it was raised to its current level of $455 per week—the equivalent of $23,660 in annual pay. That is less than the federal poverty line for a family of four and cannot possibly be thought to reflect executive- or professional-level compensation. By 2016, fewer than 7 percent of salaried workers nationwide were covered for overtime by the FLSA’s salary threshold.4

Unfortunately, the Massachusetts law on this issue is just as obsolete. The federal salary threshold of $455 per week currently applies for the EAP exemption from overtime in Massachusetts. Notably, this is less than a full-time salary at the Massachusetts minimum wage. Someone working 40 hours at the current state minimum wage of $12 per hour would earn $480—meaning that it would be illegal for a worker in Massachusetts to be paid a salary that would make them eligible for overtime based on the salary test. Thus, one of the essential tests—and arguably the most straightforward and effective test—for determining who is a bona fide executive, administrator, or skilled professional is completely meaningless under Massachusetts law.

It is not hard to imagine how this loophole in the EAP exemption could be exploited. Consider a line worker at a fast food restaurant or a discount retailer being paid hourly at the state minimum wage. If their employer decided that they wanted this employee to work more than 40 hours per week, they could easily give that employee token managerial responsibilities, convert them to a salary of $480 a week (the equivalent of a minimum wage salary), and then require them to work 50, 60, 70, or more hours a week, paying them only minimum wage for those additional hours. In other words, they could be legally denied the time-and-a-half premium pay that is supposed to compensate for, and discourage, excessive hours of work. Indeed, the DOL rulemaking record is full of stories of employees working 60 or 70 hours a week without any extra compensation for their long hours.

There is no reason why someone with a job title that includes the word “manager”—but whose job primarily involves performing the same tasks as front-line staff—should be exempt from the same overtime protections afforded front-line workers unless he or she is being fairly compensated.

Background on recent federal overtime rulemaking

As my EPI colleague Heidi Shierholz noted in recent public comments, the current administration’s rulemaking on overtime “does not go nearly far enough to protect workers.”5 As she explained, in 2016, the U.S. Department of Labor finished an exhaustive two-year rulemaking process to raise the FLSA’s salary threshold for the EAP exemption. The department met with over 200 entities, including employees, employers, business associations, nonprofit organizations, employee advocates, unions, state and local government representatives, tribal representatives, and small businesses.6 The department also received and reviewed over a quarter million public comments, and conducted a thorough economic impact analysis. The 2016 final rule would have raised the EAP salary threshold to $913 per week or $47,476 on an annualized basis, the latter being the 40th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region, which was at the time, and continues to be, the South.7 Further, the rule provided that the threshold would be updated every three years to the 40th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region, in order that the threshold would not continually erode over time as the wage distribution rises. EPI projects that the 2020 level of the threshold under the 2016 rule would be $982 per week ($51,064 for a full-year worker).

In November 2016—just before the 2016 rule was set to go into effect—a single district court judge in Texas enjoined the department from enforcing the rule; the court later erroneously held the rule to be invalid. Instead of defending the rigorously determined threshold, the Labor Department under the Trump administration decided to rescind its 2016 rule and promulgate a new regulation with a much lower standard salary threshold. The department’s 2019 proposal is to set the salary threshold under which most salaried workers are eligible for overtime pay when they work more than 40 hours per week at $679 per week in 2020 ($35,308 for a full-year worker), which is the projection to January 2020 of the 20th percentile of the earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, and/or in the retail industry, excluding nonexempt workers and workers who are not subject to the FLSA or who are not subject to the salary level test. The proposal does not include automatic updating.

Though an improvement over the current threshold, the salary threshold of $35,308 proposed in the Trump administration’s rule cannot possibly be construed as an executive-level salary. Moreover, when the Massachusetts state minimum wage reaches $15 in 2023, the federal EAP salary threshold will only be modestly above a full-time salary at the state minimum wage ($31,200 annually).

Updating the Massachusetts overtime salary threshold

Had the 2016 rule been implemented, this problem of severely eroded overtime protections for lower-paid managers and administrative workers would already be solved. But as is often the case, state lawmakers must now step in to fix a problem caused by decades of federal inaction.

H. 1609 and S. 1092 would reinstate the salary test as an effective labor standard in Massachusetts law, and restore protection against excessive unpaid hours for hundreds of thousands of Massachusetts workers. The legislation would gradually raise the salary threshold for the EAP exemption from overtime in Massachusetts over four years: it would be set at an annual salary of $35,000 in 2021; $45,000 in 2022; $55,000 in 2023; and $64,000 in 2024. (These annual salaries correspond to weekly earnings of $673, $865, $1,058, and $1,231, respectively.) In subsequent years, the threshold would be automatically adjusted to match either changes in the median weekly earnings of salaried workers, or two times the Massachusetts minimum wage, whichever is greater.

The salary levels specified by this legislation are well-targeted and consistent with both historical precedent and the 2016 federal Department of Labor’s rulemaking. If the 1975 threshold, which covered nearly 63 percent of the salaried workforce, were simply raised with inflation up to today and projected inflation out to 2024, it would be equal to $1,268 per week—nearly identical to the threshold proposed in H. 1609 and S. 1092. Similarly, following the U.S. Department of Labor’s methodology, the 40th percentile of salaried earnings for the Northeast Census region in 2019 is projected to be $61,048, or $1,174 per week. Projecting this value out five years to 2024 at the CBO’s projected rate of inflation would raise it to $1,322—slightly higher than the threshold proposed by H. 1609 and S. 1092. In other words, the threshold established by this legislation has a strong basis in both precedent and current regional pay levels.

The legislation smartly phases in the new threshold over several years, giving employers time to adjust employee salaries, schedules, or workloads to conform to the law. And because the threshold would be linked to either growth in median salaries or changes in the state minimum wage, the legislature will not need to revisit this threshold in the future. As nominal salaries rise over time, or if the legislature chooses to raise the state minimum wage, the EAP exemption threshold will be automatically adjusted to ensure that it remains at a level consistent with higher-paid executives, administrators, and professionals.  Automatic annual adjustment is also important for businesses, as it allows them to plan for the annual change, as opposed to wondering when the legislature will again chose to make an update.

Raising the EAP exemption salary threshold to $64,000 by 2024 would extend new overtime protections to an estimated 168,000 salaried employees in Massachusetts.8

Importantly, the change would also strengthen overtime protections for 267,000 salaried workers in the state who are likely eligible for overtime protection right now, but who may be misclassified as exempt. Thus, setting an appropriate threshold brings clarity to the rights of employees who are already covered and to the duties of their employers. Many salaried employees paid above the current $455 per week threshold are entitled to overtime pay because their primary duties are not executive, administrative, or professional. This includes workers in scores of occupations, from paralegals and postdoctoral researchers to dental assistants and copy editors. Most bookkeepers are entitled to overtime pay, for example, but many do not know it, and neither do their bosses. With a $64,000 salary threshold, this ambiguity goes away—employees paid less could be sure of their rights and employers would know their responsibilities.

Altogether, there are about 435,000 salaried employees in Massachusetts who would have their right to overtime established or clarified by a higher threshold.

How the change would affect businesses, workers, and the Massachusetts economy

As a result of the proposed change, some employers will have to adjust their pay, scheduling, and possibly staffing practices because of new overtime eligibility for some of their staff. There are several ways through which employers could adjust:

1. They can pay overtime (time-and-a-half) for the hours in excess of 40 per week worked by employees whose salaries are below the threshold.
2. They can reduce the hours of overworked employees and share those employees’ workloads with other staff. For example, an assistant manager who now helps stock shelves and cleans floors, adding 20 extra hours to her work week without any extra compensation, could have that work assigned to part-time employees, who will benefit from the extra hours and pay. Some employers may find it advantageous to hire additional staff rather than pay the overtime premium to existing staff.
3. They can raise salaries above the threshold if they want to continue working certain employees more than 40 hours a week without paying for or keeping track of overtime.
4. They can manage time more efficiently, avoiding late-in-the-day meetings, for example, and demand that employees complete their weekly tasks within 40 hours.9

It is important to understand that none of these changes would require reclassifying any salaried staff as hourly employees—although some employers may choose to do so. It would simply require that employers record hours worked when eligible salaried staff work more than 40 hours per week. Because most employers already have at least some nonexempt staff, every major payroll system can already process overtime pay, meaning that most employers will not need to adopt new payroll or compliance systems. The change would also not stop or impede employers from having flexible scheduling policies; employees could still arrange flexible schedules, they would simply start gaining additional pay when their schedules exceed 40 hours per week.

For affected workers, these changes will lead to clear improvements in their well-being. A worker who previously was required to work long hours will now receive higher pay (either as a result of overtime premium pay or a salary increase up to the new threshold), more free time away from work, or both.

This change will also benefit the broader Massachusetts economy. First, overworked employees are less productive. Research shows that employees who have adequate time to rest and recuperate each week, or between shifts, are more productive, and less prone to at-work accidents and injuries.10 Second, as employers adjust staff schedules and workloads, they may find it advantageous to hire additional staff instead of paying overtime premiums for extra hours by existing staff. In this way, raising the overtime threshold can stimulate job growth. Third, because at least some portion of affected workers are likely to receive higher pay, expanding overtime protections can strengthen consumer buyer power, particularly for middle-class households whose spending is the core driver of U.S. economic growth. Fourth, excessive work hours are linked to a variety of worse health outcomes, including increased risk of stroke and heart disease.11 Thus, reducing overwork has public health benefits.

Finally, giving workers more time away from work gives them invaluable time to spend with their families, to help their children with homework, to coach youth sports, to engage in volunteer or civic activities, or to care for themselves or loved ones. Time is the one resource that we can never get more of. Just as workplace laws protect people’s health and safety, they also need to value and protect workers’ time.

H. 1609 and S. 1092 would provide an essential correction to state law and would restore one of the core labor standards that helped build and grow the middle class through the 20th century—the right to overtime for excessive work hours. I strongly urge you to enact this legislation.

Endnotes

1. The “administrative” category refers to workers who are part of the administration of an organization. In other words, those whose work is directly related to the management or operations of an employer, and who exercise independent judgement about matters of significance. Administrative assistants (or similar clerical or support staff) would not qualify as exempt administrators under the EAP exemption unless their regular duties included consequential, independently-made decisions about the management or operation of an organization.

2. See L. Camille Hébert, et al., “Law Professor Comments Regarding ‘Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,’” submitted to U.S. Department of Labor September 4, 2015.

3. U.S. Department of Labor, Wage and Hour Division, “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Acts (FLSA),” revised July 2008.

4. Celine McNicholas, Samantha Sanders, and Heidi Shierholz. 2017. What’s at Stake in the States if the 2016 Federal Raise to the Overtime Pay Threshold Is Not Preserved—and What States Can Do About It. Economic Policy Institute, November 15, 2017.

5. See Heidi Shierholz, “EPI Comments Regarding the Department of Labor’s Proposed Overtime Rule,” public comments submitted via regulations.gov to Amy DeBisschop, Acting Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, May 21, 2019.

6.  Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees [final rule], 81 Fed. Reg. 32396 (May 23, 2016).

7. U.S. Department of Labor, Wage and Hour Division, “Final Rule: Overtime,” revised January 2018.

8. Economic Policy Institute analysis using Current Population Survey microdata.

9. For a longer discussion of these methods of adjustment, see Lonnie Golden, “Long-overdue overtime update will give boost to workers and economy,” The Conversation. July 17, 2015.

10. See John Pencavel, “The Productivity of Working Hours,” Economic Journal 125, no. 589 (2014): 2052–2076; Lonnie Golden, “The Effects of Working Time on Productivity and Firm Performance, Research Synthesis Paper,” International Labor Organization (ILO) Conditions of Work and Employment Series 33 (2012); Allard E. Dembe,  J. Bianca Erickson, Rachel G. Delbos, and Steven M. Banks, “The Impact of Overtime and Long Work Hours on Occupational Injuries and Illnesses: New Evidence from the United States,” Occupational and Environmental Medicine 62, no. 9 (2005): 588–597; Heather Boushey, and Bridget Ansel, Overworked America: The Economic Causes and Consequences of Long Work Hours, Washington Center for Equitable Growth, May 2016.

11. Mika Kivimäki et al., “Long Working Hours and Risk of Coronary Heart Disease and Stroke: A Systematic Review and Meta-Analysis of Published and Unpublished Data for 603,838 Individuals,” The Lancet, August 20, 2015.

Dear Representatives Foxx, Scott, Byrne, and Takano:

The Economic Policy Institute is pleased to submit this letter in regards to the February 16, 2017, Subcommittee on Workforce Protections hearing, “Federal Wage and Hour Policies in the Twenty-First Century Economy.” The Economic Policy Institute, a nonprofit, nonpartisan organization, is this country’s premier think tank that focuses on the economic condition of low- and middle-income workers and their families. We are deeply interested in any changes to wage and hour policies that protect workers. The components that must be a core part of any reform related to the minimum wage and to overtime protections are described below.

The Minimum Wage

The current federal minimum wage, $7.25, is roughly 25 percent below its historic value in real terms. A full-time worker with one child who earns the federal minimum wage is earning below the federal poverty line. There is an enormous amount of rigorous research on the economic impacts of minimum wage increases, and what the weight of that literature shows is that minimum wage increases have raised wages but have caused little to no negative effect on the employment of low-wage workers. The vast majority of those who would benefit from an increase in the minimum wage are adults in working families, they are disproportionately women, and their households depend on these earnings to make ends meet.

Any reform related to the minimum wage must do the following things:

1. Establish a wage floor that ensures a decent standard of living for all workers. The Raise the Wage Act of 2015 provides a blueprint for what a decent wage floor could be, along with reasonable steps to get there.
2. An increase of the minimum wage must be accompanied by gradual phasing out of a lower subminimum wage for tipped workers. Tipped workers experience dramatically higher poverty rates in states where they can be paid a separate, lower minimum wage, and this practice must end.
3. To prevent future erosion of the minimum wage and to provide predictability for employers, the minimum wage should be indexed to growth in overall wages on an annual basis.

Overtime Protections

To help ensure the basic, family-friendly right to a limited workweek, the Fair Labor Standards Act (FLSA) requires that most workers—including both hourly and salaried workers—be paid at least 1.5 times their regular rate of pay when they work more than 40 hours a week. One narrow exception to this is for bona-fide executive, managerial, and professional workers. However, the way that exception is defined has become woefully out of date, and in May of 2016, the Department of Labor issued a rule to provide a much needed update. The rule is currently under a nationwide injunction, but that injunction will hopefully be short-lived, since the rule delivers better work-life balance and fairer pay to millions of workers.

The new rule updated the salary threshold below which most salaried workers are entitled to overtime pay if they work more than 40 hours a week. Before this rulemaking, the threshold had been updated only once since 1975, and had thus eroded dramatically—providing overtime protections to less than 10 percent of full-time salaried workers, compared with more than 60 percent in 1975. The current threshold of $455 per week ($23,660 annually for a full year) is well under the poverty threshold for a family of four.

The update includes two crucial components:

1. It increases the salary threshold from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). This updated threshold is well within historical norms; if the 1975 threshold had simply kept up with inflation, it would now be around $57,000 annually.
2. It automatically updates the salary threshold every three years based on weekly wage growth of full-time salaried workers. Thus, as salaries rise over time, the threshold would rise with it, ensuring that the standard laid out in the new rule is preserved, instead of steadily weakening over time. This is good for workers and provides crucial predictability to employers.

These updates to the overtime rule mean that millions of workers, disproportionately women, would likely be asked to work fewer overtime hours, and would get the overtime pay they deserve when they do work more than 40 hours a week. This is good for families; close to 2.5 million children would see at least one parent gain overtime protections. And an increase in the threshold would be a job creator, with Goldman Sachs estimating that it would add around 100,000 jobs to the economy.

Since 1975, the top 5 percent of all households have seen their incomes grow by more than 90 percent, whereas the median (or “typical”) household has seen its income grow by less than 20 percent. That means that the last quarter of the 20th century and the first 17 years of the 21st century have been marked by rising inequality. Reform for the 21st century should focus on reversing that rising inequality and building a fairer economy. Providing a strong minimum wage and overtime salary threshold, and then indexing them going forward so they don’t erode over time as prices and wages rise, are common sense steps towards creating an economy that works for everyone and should be at the center of any effort to “update” wage and hour policy for the 21st century.

Sincerely,

Heidi Shierholz
Senior Economist and Director of Policy
The Economic Policy Institute
1225 Eye St. NW, Suite 600
Washington, DC 20005

I want to thank Chairman Smith, Chairman Gallegly, and the members of the subcommittee for inviting me to testify today. My name is Ronil Hira. I am a professor of public policy at the Rochester Institute of Technology in Rochester, New York. I have been studying the H-1B program and high-skill immigration since 2000. I appreciate the opportunity to share my thoughts about how the H-1B program is currently impacting the U.S. economy and American workers.¹

I have concluded that the H-1B program, as currently designed and administered, does more harm than good. To meet the needs of the U.S. economy and U.S. workers, the H-1B visa program needs immediate and substantial overhaul.

The principal goal of the H-1B visa program is to bring in foreign workers who complement the U.S. workforce. Instead, loopholes in the program have made it too easy to bring in cheaper foreign workers, with ordinary skills, who directly substitute for, rather than complement, workers already in America. They are clearly displacing and denying opportunities to U.S. workers. A sizable share of highly skilled American workers and students—engineers, information technologists, and scientists—have concluded that the H-1B program undercuts their wages and job opportunities. Those conclusions are largely correct and the program has lost legitimacy amongst much of America’s high-tech workforce.

The Great Recession—which officially lasted from December 2007 to June 2009—began with the bursting of an 8 trillion dollar housing bubble. The resulting loss of wealth led to sharp cutbacks in consumer spending. This loss of consumption, combined with the financial market chaos triggered by the bursting of the bubble, also led to a collapse in business investment. As consumer spending and business investment dried up, massive job loss followed. From December 2007 to February 2010, the U.S. labor market lost 8.7 million jobs, or 6.3% of all payroll employment. This was the most dramatic employment contraction (by far) of any recession since the Great Depression. By comparison, in the deep recession that began in 1981, job loss was 3.1%, or less than half as severe.

Even since the economy stopped contracting in the summer of 2009, its growth has not been nearly strong enough to create the jobs needed simply to keep pace with normal population growth, let alone put back to work the backlog of workers who lost their jobs during the collapse. In February 2011, 20 months after the official end of the recession, the economy still had 5.4% fewer jobs than it did before the recession started. Thus, the Great Recession has brought the worst of both worlds: extraordinarily severe job loss, combined with an extremely sluggish jobs recovery.

Thank you Chairman Jordan and members of the subcommittee for the opportunity to testify today. I am Josh Bivens, a macroeconomist at the Economic Policy Institute in Washington, D.C. In assessing the economic impact of the American Recovery and Reinvestment Act (ARRA, the Recovery Act henceforth) I’d like to make four arguments today, and they mirror the arguments I’ve made when testifying about its impact in the past.

-First, the Recovery Act was badly needed. The American economy at the end of 2008 and the beginning of 2009 was essentially in free fall and all other policy tools that had been tried had little effect in arresting the decline.

-Second, it worked roughly as advertised. By the middle of 2010 (its period of peak effectiveness) it had created up to 5 million full-time-equivalent jobs and kept the unemployment rate from flirting with 12% at the labor market’s trough. Today, absent the impact of the act the unemployment rate would surely remain in double digits. That said, the economy needed many more jobs than this—the economic crisis that the Recovery Act was meant to address called for much stronger medicine than the act by itself could provide.

-Third, while it was as effective as advertised, it was significantly cheaper than advertised. While the sticker-price of the Recovery Act (estimated at $787 billion when passed and boosted to $862 billion) is often characterized in press accounts as enormous, it was less than half as large as the tax cuts enacted during the 2000s, smaller than the cost of wars in Iraq and Afghanistan, and, most importantly, small relative to the economic shock it was meant to absorb. Further, because it spurred economic activity and tax collections and reduced the need for safety-net spending, its net budgetary impact was likely well below its headline cost.

-Fourth, lessons learned from the passage of the Recovery Act should be heeded: More fiscal support should be provided to prop up the economy and spur a genuine recovery in the jobs market. While the economy today would be worse off if the Recovery Act had not passed, unemployment still sits at 9.0% today, will almost surely rise above 9.5% over the coming year, and will not return to pre-recession levels until several years from now (in 2016, if the Congressional Budget Office forecast is right) unless more fiscal support is provided.

Good morning, Chairman Harkin.  I am Ross Eisenbrey, Vice President of the Economic Policy Institute.  EPI is a non-partisan think tank with a long history of analyzing trends in employment, compensation, and income, as well as advocating for policies to ensure shared prosperity.  We are founding members of two important coalitions: Retirement USA—28 organizations advocating for a retirement system that delivers universal, secure, and adequate retirement income—and Strengthen Social Security—a coalition of more than 150 organizations who feel strongly that Social Security benefits should not be cut and the retirement age should not be raised. Today, however, I speak only for myself.
 
Polls show that Americans are scared about their retirement.  In a recent Gallup poll of people ages 44 to 75, more than 90% said we are facing a retirement crisis, and 61% said they fear depleting their assets more than they fear dying.  Unfortunately, they have good reason to be scared.
 
According to the Center for Retirement Research, American households ages 32 to 64 currently have a retirement income deficit of $6.6 trillion, a figure that dwarfs the federal deficit and casts a pall over hopes of them retiring in any kind of comfort.  That is how far behind they are in building sufficient pensions and private savings to maintain their standard of living in retirement. This sum comes to $90,000 per household, on average, which means these households have about half of what they need in retirement savings.
 
I have three main points to make in this testimony today:

1. Congress has made matters worse by focusing retirement policy on high-income households and neglecting low-income workers;
 
2. Congress and the Obama Administration will make matters even worse if they raise the Social Security retirement age; and
 
3. There are potential solutions to the retirement crisis, but tweaks and small changes at the margins won’t be enough.

1. Congress has made matters worse by focusing retirement policy on high income households and neglecting low-income workers.
 
The median household income of seniors in 2008 was less than $30,000, about half that of households under 65.
 

 
While nothing to tout, the financial situation of seniors today might be as good as it will ever get for the typical American.  Between declining pension coverage and Social Security cuts, it is possible that the next generation to retire will be the first to be worse off than its predecessor.
 
The surest vehicle for retirement savings (other than Social Security) has been the traditional defined-benefit pension, which is disappearing.  Almost from the day in 1978 that Congress created an alternative savings vehicle, the 401(k) plan, employers have been shifting employees out of pension plans and into these accounts that put all of the risk and more of the cost onto the backs of individual workers.  Only about one private sector employee in five is still covered by a real pension plan.
 
Traditional pension plans are pooled investments, managed by professionals, and spread risks over many years (even generations), while 401(k) participants must make their own investment decisions and bear the risk of adverse investment performance. But most 401(k) participants do not have the financial expertise to manage their investments. Many fail to diversify sufficiently and often make poor investment decisions. They tend to have an all-or-nothing approach to risk, and despite the lessons of Enron, many still have funds invested in employer stock.
 

 
Luck plays an oversized role in whether retirement savings in personal accounts will be adequate.  Even 401(k) participants who make relatively conservative investment allocation decisions over a long time horizon are subject to unacceptable risks. Gary Burtless of the Brookings Institution has estimated that 401(k) participants who contributed 4% of her wages over 40 years and invested the funds in a portfolio split equally between long-term government bonds and stocks would be able to replace a quarter of their pre-retirement earnings if they retired in 2008. This replacement rate is only half as much as a similar worker who retired in 1999, but much better than a worker who retired in 1974, who would have a dismal replacement rate of only 18%.
 
Another key risk—one the Gallup survey identified—is longevity.  A real pension guarantees a monthly payment for a lifetime, whereas retirees can and do outlive their 401(k) assets.
 
And finally, the fees associated with 401(k) plans can decimate long-term returns.  The Center for Retirement Research estimates that net investment returns were a full percentage point higher for defined-benefit pension plans than for 401(k)-type defined-contribution plans between 1988 and 2004, despite a lower concentration of funds invested in equities.  With compounding of the returns on the investment, this small-sounding difference can translate into a 30% larger nest egg at retirement.
 
The end result of the shift from secure pensions to insecure 401(k)s and Social Security cuts can be seen in the following chart, which presents the likelihood of inadequate retirement income for three successive generations, each with a smaller share of pension coverage than the generation before.
 

 
I hope this committee will recognize that the retirement income deficit we are leaving for the Gen Xers is at least as serious as the “burden of debt for our grandchildren” that gets so much attention in the media and in political debate.
 
How can it be that after 32 years and trillions in tax subsidies, 401(k)s have worsened—rather than improved—retirement security?  First and foremost, the design of the 401(k) ensures that its tax subsidies go disproportionately to high-income earners who least need the government’s help in saving, while providing little or nothing to low-income earners, many of whom struggle to meet their daily expenses, let alone save for a distant retirement.
 
The Urban-Brookings Tax Policy Center estimates that 80% of the tax subsidies for retirement savings go to the top 20% of earners.  This is government welfare stood on its head.  There is no rationale for providing a larger tax break to a millionaire than to a Wal-Mart cashier for the same dollar contribution to a 401(k) plan (and nothing at all if the cashier owes payroll but not income tax).  Similarly, high earners receive more help from employers, who contribute 5% of earnings, on average, to the retirement accounts of households in the 75th percentile, compared with less than 2% for those at the 25th percentile, according to the Congressional Research Service.
 
Rather than continue to make this situation worse by increasing the 401(k) contribution limits, which benefits only the highest earners, Congress should re-structure the tax subsidies to ensure that they help everyone save for retirement and provide no greater aid to the upper class than to the working class.  One common sense improvement would be to change the current system of deductions into tax credits and make them refundable.  But bolder steps are called for.
 

 
The system of relying on tax subsidies to expand the employer-based retirement system has proven a failure. Only about half of all private sector workers in the Uni
ted States between the ages of 25 and 64 participate in a retirement plan—and participation is much lower for blacks and Hispanics.  Despite rising enroll ment in 401(k)s, this figure has remained essentially unchanged for 30 years because employers have simply replaced traditional pensions with 401(k) plans.

 
2. Congress and the Obama Administration will make matters worse for most Americans if they raise the Social Security retirement age.
 
Knowing that retirement insecurity is growing and that the coming generations are even less well prepared than those nearing retirement now, how can Congress consider raising the retirement age, which is exactly the same as a benefit cut?
 
Social Security is the one part of retirement income working people can count on.  It isn’t adequate—it replaces only 39% of pre-retirement income for the average retiree—but it is universal and secure.
 
Unfortunately, we are already weakening this foundation of our retirement system, and some are proposing further cuts. Taking into account the increase in the normal retirement age from 65 to 67 as well as Medicare deductions and income taxes paid on benefits, the net replacement rate for the average earner retiring at 65 is already scheduled to drop from 39% to 28% in two decades.
 

 
The trust fund has more than $2 trillion and will be able to pay 100% of promised benefits for another 27 years.  Even then, Social Security will not “go broke” but will be able to pay 78% of promised benefits.
 
So the question isn’t how to “save” the program; it will survive without any change.  The problem is how to get more money into the trust fund so full benefits can be paid in perpetuity.  The goal is, or ought to be, to preserve full benefits and to maximize the retirement income of the tens of millions of households that depend on Social Security.
 
Yet the Peterson Foundation and a host of other mostly well-off “experts” have managed to convince much of the media and many Washington policy makers that the way to save Social Security benefits is to cut them.  Working people can see through this, however, and every poll shows large majorities that reject cuts in benefits, reject raising the retirement age, and support higher taxes to pay for promised benefits.
 
Despite what we have heard from your former colleague, Alan Simpson, the average Social Security recipient isn’t living in a gated community.  The average benefit is about $14,000—less than a minimum wage income—and Social Security provides more than half the income for 55% of seniors.  Cutting such modest benefits means reducing the consumption and living standards of tens of millions of households.
 
The cuts that Simpson, Alice Rivlin, and others call for would come on top of major cuts Congress imposed in 1983, which are still taking effect. I know that you, Mr. Chairman, and Sen. Sanders understand that raising the retirement age is not a fair way to deal with longer life expectancies.  You should both be commended for introducing S. Res. 664, your Sense of the Senate Resolution opposing any benefit cuts.
 
Over the past quarter century, life expectancy at age 65 has increased by one year for lower-income men, compared to five years for upper-income men. Men in the lower half of the earnings distribution have not even caught up to where upper-income men were in 1982. In the case of women, although life expectancy has grown slowly overall, lower-income women are actually seeing declines and upper-income women are seeing only modest improvements. The general pattern appears to hold with older women as well.
 
Second, many workers in physically demanding jobs are already unable to work to the full retirement age.  They retire before 66 because a lifetime of working on their feet as cashiers, or doing construction, or lifting patients in a nursing home, have worn them out and left them hurting.  It is easy for a Member of Congress, an economist, or a lawyer to imagine working until 70, but it is much harder to imagine a truck driver or factory worker doing so. Research by Hye Jin Rho of the Center for Economic and Policy Research found that 45% of older workers last year were employed in physically demanding jobs or jobs with difficult working conditions. These are jobs most likely to be held by less educated workers who are more likely to find themselves out of work late in life.
 
Third, raising the retirement age disproportionately hurts low-income Americans who rely on Social Security the most. A two-year increase in the retirement age is equivalent to a 13% cut in benefits for someone who retires at 65. For seniors in the bottom fourth of the income distribution, this translates into an 11% cut in much-needed income, because these seniors rely on Social Security for 84% of their total income. For seniors in the top fourth of the income distribution, however, this would amount to a 2.6% percent cut in total income. This is not to suggest that we should shrink Social Security by targeting cuts at the top, however, because Social Security’s strength is its universality. The fact that even high-income earners have an important stake in Social Security is why the program has remained almost unscathed for 75 years, while other parts of our safety net are in tatters.
 
As Social Security Chief Actuary Stephen Goss has pointed out, the main pressure on the cost side isn’t rising life expectancy, but rather declining birth rates. Revenues, however, are also declining due to stagnant wages, growing wage inequality, and rising health care costs.
 
The Greenspan Commission predicted the Baby Boom and rising longevity and took them into account when they balanced benefit cuts and increased revenues.  What the Commission didn’t anticipate was the enormous growth in inequality, that the top 1% would get 55% of all income growth over the last 30 years, while the bottom 90% would get only 16%.  Rising inequality has meant that much more income growth has occurred above the taxable income cap than below it, shrinking the program’s revenue dramatically.
 
As the earnings of most workers have stagnated and earnings of those at the top have skyrocketed, the system’s revenues have suffered because earnings above the taxable earnings cap—currently set at $106,800—are not subject to the Social Security payroll tax. Though the cap is indexed to average wages, these wages have not grown as fast as earnings at the top, leading to an erosion of Social Security’s tax base. As a result, the share of untaxed earnings grew from 10% in 1983 to around 16% in 2008.
 
The problem has been compounded by health care cost inflation, which increases the share of compensation going to untaxed fringe benefits. The Social Security actuaries estimate that the recent health care overhaul will somewhat mitigate this problem, but health care cost inflation remains a problem for Social Security and the economy as a whole.
 
Most Americans don’t realize that someone with a salary of $300,000 or even $30 million a year pays no more in Social Security taxes than someone earning roughly $107,000.  When they do realize this, they don’t like it.  A poll commissioned by the Rockefeller Foundation and the National Academy of Social Insurance (NASI) found that 83% of respondents support lifting the Social Security tax cap so that all workers pay the same payroll tax rate, regardless of income.  

In prior congressional testimony, EPI Research and Policy Director John Irons recommended a variation on elimination of the cap: eliminating it for employers while retaining but raising the cap on high-income em
ployees.  With earnings up to the employee cap credited for benefit purposes, this change would reduce the long-term funding shortfall by about three-fourths.

There are several advantages to this approach. It would eliminate most of the long-term shortfall, while maintaining a link between contributions and benefits. It would not lead to extremely large benefits for millionaires, which could be a concern if all earnings were credited for benefit calculations. Finally, self-employed taxpayers, who are responsible for both the employer and employee contributions, would not face as large an increase in payroll taxes as a full elimination of the cap.
Furthermore, this option would have a modest impact on the standard of living of upper-income taxpayers. On the employee side, this would mean an increase in tax payments of, at most, 2.6 percent of income. If income growth for the top 5% of households continues as it has for the past 20 years, and assuming that all 6.2% of the employer tax were passed on to employees in the form of lower wages, this additional tax obligation would be recouped by these households in less than four years. Affected taxpayers would also recoup some of these higher taxes in the form of higher benefits.

3. There are potential solutions to the retirement crisis, but tweaks and small changes at the margins won’t be enough.
 
Given the $6.6 trillion retirement income deficit, strengthening Social Security, rather than further weakening it by reducing benefits, is a necessary but insufficient first step to restoring retirement security.  As we said at Retirement USA’s inaugural conference last year:
 
“We need a comprehensive solution that addresses interrelated problems. For example, a system that places most of the burden for retirement saving on individuals will always have to wrestle with the problem of pre-retirement loans and withdrawals (simply plugging these leaks will not work, because many workers would stop contributing to the system). A system that relies on tax incentives to promote individual retirement savings will necessarily tend to favor high-income workers who can afford to save more and who benefit the most from these tax breaks. Conversely, a truly universal system would need to shield low-income workers from out-of-pocket costs or wage cuts.”
 
EPI has published and advocated what we feel would be an excellent national supplemental retirement plan, the Guaranteed Retirement Account, which was authored by Prof. Teresa Ghilarducci, Director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research.  In a nutshell, the GRA would mandate employer and employee contributions to a federally administered cash balance plan.  The combined 5% of payroll contributions would be invested by a Thrift Savings Plan-like entity in the bond and stock markets, with a guaranteed minimum return of 3% beyond inflation.  A $600 tax credit would cover the entire 2.5% contribution for workers earning $24,000 or less, and greatly reduce the effective contribution rate for other lower-paid workers. We calculate that at the end of a normal working life, the average worker would accumulate, along with Social Security, enough to assure a 70% replacement rate of pre-retirement income.
 
Retirement USA has not endorsed the GRA, except to affirm that it meets all of the 12 principles the coalition set out as essential to deliver retirement income that is universal, secure, and adequate. Our coalition has asked the public for other model reform plans that meet our principles and have received more than two dozen that satisfy most or all of them.  It is clear to the Retirement USA coalition that any successful model will have certain common elements:
 
• All jobs must come with benefits that provide a steady retirement income for life. As currently structured, Social Security is not enough. Relying primarily on tax incentives to encourage employers to provide benefits or individuals to save is ineffective and helps those who least need it.
 
• Investment and longevity risks must be spread, not just shifted from employers to workers. Here too, government can play a role, and so can multiple-employer plans.
 
• Responsibilities must be shared. A do-it-yourself system does not work, but neither does a system that places the entire burden on employers. Government must also be involved, especially to offset the cost of contributions for lower-income workers.
 
• Finally, the key to achieving adequacy is maintaining steady contributions and preserving funds for retirement by preventing pre-retirement loans and withdrawals and by limiting fees.
 
The most interesting plans we received include the Variable Defined Benefit Plan conceived by Gene Kalwarski, CEO of Cheiron, Inc., the Retirement USA-Plus presented by Nancy Altman, Chairman of the Board of the Pension Rights Center, and Glenn Beamer’s Guaranteed Pension and Community Investment Plan, all of which are summarized, with others, on the Retirement-USA website (www.retirement-usa.org).

Read the complete testimony

“The nation’s current jobs crisis is severe and there will be continued high unemployment through the end of 2011,” he said. “It is incumbent upon Congress to act on a scale that will produce millions of jobs in order to put unemployment on a steep downward path.”

Mishel’s testimony: Monetary Policy and the State of the Economy

“While the economy today would be worse off if the Recovery Act had not been passed, unemployment still sits at 9.5% today and will surely rise above 10% over the coming year, returning to pre-recession levels only several years from now unless more fiscal support is provided,” Bivens said.