How Means Testing Social Security Could Backfire

April 13th, 2011 at 6:24 pm | 12 Comments |

| Print

Yuval Levin’s provocative essay on going “Beyond the Welfare State” offers the following prescription for a conservative re-thinking of entitlements:

Second, essentially all government benefits — including benefits for the elderly — should be means-tested so that those in greater need receive more help and those who are not needy do not become dependent on public support. Most retirees would still receive some public benefits (and the poorest could well get more than they do now), but the design of our welfare programs would avoid creating the misimpression that they are savings programs. People who are already retired or nearly so today should be exempted from such means-testing, as they have planned for decades around the existing system; Americans below 55 or so, however, should expect public help only if they are in need once they retire. Means-testing should, to the extent possible, be designed to avoid discouraging saving and work. And private retirement savings should be strongly encouraged and incentivized, so that people who have the means would build private nest eggs with less reliance on government.

Means-testing for entitlements for the elderly has been a notion recently gaining in popularity among some sectors of the right, but I think there is reason for some skepticism about means-testing all elderly entitlements, particularly Social Security.

One of the more dangerous aspects of Great Society-style welfare was its encouragement of unsustainable and deleterious behaviors. Welfare checks provided to single mothers were no doubt motivated by a worthy spirit of compassion, but those very same checks indirectly financed the breakdown of the urban family. Rather than ending misery, they often ended up subsidizing it. Unlike private charity, government subsidies can create a sense of entitlement that may undermine the behaviors necessary to support a government capable of providing such subsidies.

As it stands now, Social Security mostly avoids that trap. Whether you manage your resources well in retirement or manage them poorly, you receive the same check. Far from encouraging bad economic behavior, Social Security tends to reward good economic behavior: if you achieve success in the workplace and improve your salary, you also reap a higher Social Security check when you retire. But even if you struggle in the workplace, you still will collect some benefit to help you in your old age. In many respects, this is exactly how government should work from a conservative perspective: it rewards industry but also provides a safety net for the less fortunate.

Means-testing could utterly vitiate that structural tendency. Instead of rewarding a person for economic success over a career, means-testing for Social Security could penalize them for this success. Levin notes some of the challenges of means-testing when he says that means-testing “should, to the extent possible, be designed to avoid discouraging saving and work.” Yet I think it might be very hard to means-test Social Security so that it did not discourage saving and work.

If we means-tested Social Security based on the net-worth of a household, we would give the elderly little incentive to save. Say government offers the following choice: live close to the bone for years until you exhaust your savings and then get a Social Security benefit OR spend it extravagantly and then get that very same benefit. What choice would many people make? While elderly men and women are unlikely to start an explosion of illegitimacy (thankfully), subsidizing profligacy and discouraging prudence are rarely smart policies for a government; our current economic troubles are testament to the dangers of that course of action.

Means-testing on income could result in a significant lowering of the standard of living for the elderly. Right now, elderly Americans who have some level of health can work to supplement their Social Security income and so raise their standard of living. Means-testing could take that incentive away. The elderly could sit at home and collect that government check OR they could go out and work, with the dollars earned in the workplace eating into their government checks. Many people of an advanced age would find it hard to earn enough in the market in order to make more than their government-guaranteed income, so many elderly Americans might find Social Security checks the absolute limit for their income.

I suppose some of these doubts are predicated on my suspicion that Social Security is not driving any potential entitlement crisis. Currently around 4.8% of GDP, Social Security is scheduled to peak at around 6.1% of GDP and stay around there for as far as federal actuarial accounting can see. That is a manageable number and a manageable increase. Many deficits the program may face could be eliminated by making a few relatively minor changes to the program (such as raising the cap on taxable income). Compared to something like Medicare, Social Security is very sustainable.

Granted, some of these objections could be worked around, but fiddling with Social Security is a dangerous business, and not only from a short-term electoral perspective. Compared to many government programs (including many means-tested ones), Social Security provides a social insurance safety net of equity while also encouraging individual initiative and prudence. Those advantages should not be overlooked.

Originally published at A Certain Enthusiasm.

Recent Posts by Fred Bauer



12 Comments so far ↓

  • NRA Liberal

    Means-testing is the first step towards getting rid of it entirely.

    Read this:

    http://www.interfluidity.com/v2/1272.html

    • Smargalicious

      DO you even realize the corruption and fraud within Social Security? Or, are you simply a Marxist?

  • mikewaz

    Instead of a means test, why not do something like Jed Graham’s Old-Age Risk Sharing? For those unfamiliar with the proposal, you start out your time on Social Security with a percentage of your full Social Security benefits based on your average income over your lifetime. People who made less on average start out with a higher percentage (say 95% for the utterly indigent), while people who made more start out with a lower percentage (say 50% for the super wealthy). As you age, your benefit gradually expands over fifteen years to your full benefit level.

  • Rob_654

    Oh yes – those social security as just so HUGE that I can see everyone saying, Hey let’s party so I make sure I can live on those FAT social security checks each month and live high on the hog.

    How about if we start out by saying – Ok – if you are worth $1 billion or more you don’t get a social security check then assuming billionaires don’t show up in food banks we can drop it down to maybe $100 million and go from there down to some level that will be “reasonable”.

    Then if Bill Gates, Larry Ellison, etc… want to blow their money so they can ensure that they get those good living Social Security checks when they hit the magic age – more power to them.

  • valkayec

    I’m with Mr. Frum on this one. People of all income levels who paid into the system deserve to get their defined benefit back. That was the promise and it should not be broken, regardless of the recipient’s income. However, as people with higher incomes tend to live longer for a variety of reasons, there is reason to suspect they draw more from the system than they put into it. Thus, it makes logical fiscal sense they should put more into the system by having the earnings cap eliminated to include all earned income. If that alone does not solve the solvency issue, then raise the retirement age for non-physical labor workers.

    In addition, I would revise the laws governing private retirement accounts to encourage more retirement savings. Right now, the law limits the incentives towards savings for no understandable reason except to increase tax revenues. This may not be a smart policy.

  • Houndentenor

    How many people are we actually talking about? What would the saving actually be? Is this going to save enough to be worth a big fight over?

  • hisgirlfriday

    I posted this in another thread…

    can someone explain me why people who advocate for a flat income tax support getting rid of flat social security benefits?

    • ram6968

      the rich pay a higher percentage of income in taxes so they would love a flat tax while lower incomes would pay a higher level of income in taxes…..and I too, get ticked off at the guy living on his yacht in san diego harbor collecting SSI….it’s supposed to be a safety net, not retirement

  • Rabiner

    hisgirlfriday:

    “can someone explain me why people who advocate for a flat income tax support getting rid of flat social security benefits?”

    I don’t know but as a proponent of a more progressive tax system I fully support means testing of entitlements. It’s insurance, not a retirement plan.

  • Vince

    Means testing is a reasonable long term solution to the program’s probable shortfall in 2030′s. Applying this to those 50 years old and younger, the debate can be reduced to a choice of 1) doubling the current cap which will significantly increase revenues over the years to pay full benefits for all or 2) reduce future benefits using a means testing formula. For those opting for future means tested benefits, they can maintain the current cap and use the money that would have been taxed over the current cap to invest in a private account. That’s their choice. Simply, they can trade less taxation now for a means tested benefit in the future.

  • Grandinquisitor

    Republicans need to be very careful here or it could backfire. The argument for having an earnings cap is that workers contributions are tied to benefits. If SS is turned into pure welfare then payroll taxes become income taxes for those making around 100k per year. This will result in a very regressive tax system and the whole argument for a cap goes out the window.

  • magnusfl

    Means testing would not backfire as long as it not effect those who make under 75k single /100k married and have assents less then 250k (exempting a house and 2 cars)
    but also make sure this level is adjusted for inflation.

    if this sounds harsh then why not deal with those who have become disabled for no fault of their own gets an averages 750 a month with some getting as low as 550 a month with the poverty level of 907 why do we pay people less then that and then complain for the well off getting a little less