Don't Means Test Social Security
John Rother is executive vice president for policy and strategy for AARP, which lobbies for people 50 and older.
Imposing a means test could destroy the most successful social program in our country's history. Social Security does need moderate changes to restore its long-term fiscal health. The sooner we make those changes, the more modest they can be. But Social Security does not need a change that would alter its fundamental character, create incentives against saving for retirement, and undermine its popular support. A means test would do just that.
Social Security's enduring popularity reflects the insurance nature of the program: Recipients have an earned right to their retirement benefits. Everyone who pays into the program is entitled to benefits. If you work long enough in covered employment, you qualify, no matter where you stand on the income ladder. Almost everyone with a job has a personal stake in keeping the program strong. And let's not forget the matter of fairness. Everyone who contributes through the payroll tax—including the affluent—deserves a fair return on his or her contributions. This expectation is not an exaggerated sense of entitlement. It's reasonable.
The notion that the benefits are an earned right separates Social Security from means-tested income-support programs. Social Security can help everyone. Means testing is a feature of taxpayer-funded welfare programs designed to help the poor. A means test would inevitably erode the universal and contributory nature of Social Security and some of the popular support that has sustained it for nearly 75 years.
We also should remember that Social Security already makes distinctions based on income. Lower-wage earners get a higher return on their contributions. Higher-income retirees pay income tax on a portion of their benefits. Given these progressive features, it's not logical to add a means test. In fact, Social Security is far more progressive than any other retirement program.
Preserving the traditional character of Social Security is also good for democracy. It is a popular and inclusive part of the American social contract at a time when the economic gulf between haves and have-nots is growing wider.
Imposing new limits for the well-off could backfire in various ways. A means test could adversely affect retirement planning and lower the personal savings rate if people concluded the program would penalize them for having higher retirement incomes or larger nest eggs. It would discourage older persons from continuing to work beyond eligibility age, depriving them—and the economy—of additional money. It would create incentives for people to take lump-sum distributions from pension plans, strategies that could prove shortsighted and harmful.
Too often, people who should know better speak as if Social Security faces doom unless radical changes are imposed. The reality is that it does not require a drastic solution to shore up its sustainability. According to the Social Security trustees, adjustments equal to only 2 percent of payroll would ensure solvency. A balanced package of revenue and benefit measures would do the job, and there are ways to achieve this. If we want the program to become even more progressive, it is possible to adjust the benefit formula, while still giving better-off beneficiaries a fair deal.
When this much-needed debate finally occurs, AARP will work with members of both parties to find reasonable modifications that put the program on a sound footing. Whatever the ultimate fix, it must be done in a way that preserves fairness for all contributors, protects incentives to work and save, and maintains public support.
Social Security is the largest source of income for roughly two thirds of retirees, and it helps millions live with the dignity that comes from financial independence. Just think how much our current economic travails would be magnified if Social Security were not there to fill the void left by empty savings accounts, battered 401(k) plans, and vanishing private pensions.
Adding a means test to Social Security would raise the danger that such a day looms in the future. But by preserving the universal character of Social Security, we can avoid such a tragedy.
Read why a too-entitled nation is spoiling the system, by Jean Twenge.
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Reader Comments
Social security means test
When I was a kid I used to listen to my Grandparents and stories of the depression which I found frightening. My grandparents advice was to look for work that provided a pension, save and with social security you will have a three legged stool of security. The story of the grasshopper and the ant; well I did exactly as advised. House paid off, 401k decent, defined benefit pension and annual social security statement indicates I should have a secure retirement. I voted for Obama because he said social security wouldn't be privatised where my previously republican leanings wanted to jepordize the securest part of my retirement. I am going to be an activist against any politican who will try and take what me and my employer contributed on my behalf. In particular if they draw a goverment pension.The social security benefit provides about 40% of what your salary was, pretty skimpy compared to other goverments who have decided against a Navy armada in every sea, an army and air force base on every continent and the bailout of banks, auto mfgs, and insurance companies.
Means test Social Security
A very simple, and fair, approach to saving billions in Social security payouts would be to simply start means testing once a retired person has received their total (employee+employer) contributions back, including a reasonable rate of interest, say 4%. Some simple calculations using benefit calculation estimates from http://www.socialsecurity.gov/planners/calculators.htm indicates that for workers retiring in 1990 at age 65, assuming a 100%, 66%, 50%, and 33% contribution rate based on maximum taxable earnings, will have fully been repaid in the year 2000, 1998, 1997, and 1996 respectively. If still drawing benefits, this means that this generation has been drawing benefits for the last 10 (or more) years, in excess of a fair return on their investment in the Social Security system. This money comes directly from their employed children and grandchildren and leads to excessive taxes. While many of these beneficiaries, like my grandmother at 92, rely on this as their sole support, there are many retirees in this age group that have significant assets and could easily forgo their benefits. I suggest this option should be pursued to reduce to need to continually raise taxes and retirement ages to provide excessive returns to those without need. We know from demographic statistics that this age group controls the majority of wealth in the US. To ask those with significant assets to forgo future social security checks would be fair, to both them and future generations. It's time for the "Greatest" generation to lead again. This would be a great place to start.
Social Security could be, but is not insurance.
Social Security was not intended to be insurance. Designers with more political than economic sense turned it into an entitlement.
This is the same deficit of social justice (or absence of social engineering, depending on your viewpoint) as the Child Tax Credit of $3000 for three children to one- and two-income professional couples earning in excess of 100K annually.
I see a simple solution, however. Quid pro Quo. An option to waive lifetime Social Security benefits (except those for widows and survivors) in return for a sharply reduced or waived estate tax.
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