Means testing for social Security
In order to make this timely I am cut and pasting a note from CEPR pointing to the efficacy of cutting spending in the Social Security through means testing. The MSM and politicians have proposed this and raising the retirement age as answers to ‘the deficit’ crisis, some commenters indicating a ‘tipping point’ of disaster soon to come and saying Social Security needs to be a focus of this move to prevent disaster.
Such answers can be examined one by one in this particular forum since luckily the format can offer respite from the political power plays of the moment and posturing from ‘friend and foe’ alike. Since means testing is in the media, let’s look at the numbers. Please read the 14 page document first, and then come back with comments. I apologize for not commenting in particular on the topic but cannot today.
Means testing, or reducing Social Security payments to affluent beneficiaries, has been touted as an effective way to reduce the cost of the program. A new report from the Center for Economic and Policy Research (CEPR) examines the feasibility of several different means testing scenarios and finds the potential savings to be rather limited.
“The majority of Social Security beneficiaries are lower- to middle- income people,” said Dean Baker, an author of the paper and a co-director at CEPR. “The number of beneficiaries who are by most standards considered affluent is too small to raise a significant amount of money via means testing.”
The report, “The Potential Savings to Social Security from Means Testing,” first describes the distribution of Social Security benefits by income level. The authors then look at the effects of phasing out benefits at rates of 10 and 20 percent of every dollar of non-Social Security income above $40,000 or $100,000 and find little in the way of potential savings to Social Security. The savings are even less when behavioral responses in the form of tax avoidance or tax evasion are factored in, since a means test would effectively be an increase in the marginal tax rate for wealthier seniors.
The data show that over 75 percent of social security benefits go to individuals with non-Social Security income of less than $20,000 and 90 percent goes to those with non-Social Security income of less than $40,000 a year as of 2009. If means testing that phased out benefits at 10 percent were applied to those who make $100,000 a year and assuming no change in behavior, it would only save Social Security 0.74 percent of its outlays. At a 20 percent rate, this would only yield savings equal to1.33 percent of costs. If the phase out were dropped down to $40,000, hardly wealthy by any standard, the overall savings would just be 2.77 percent of costs at the 10 percent rate and only 4.65 percent of costs at the 20 percent rate. Accounting for behavioral responses would lead to even smaller savings, could cut these potential savings by half or more.
Mean testing would also raise the cost of the program. The retirement program currently has very low costs. If the administrative expenses rose to the level of the disability portion of the Social Security program, the higher costs would likely exceed any savings from a means test.
On net, a means test would appear to be a dubious way to reduce the cost of Social Security.
Lets phrase it correctly further means testing, not means testing. First above 34k in income single and 44K for married, the current benefits are taxable, (85% of the amount). So the net cost is lessened, all be it at those levels the hit is either 10 or 15% of the benefit. In addition the benefit formula already is means tested, (low income gets a higher replacement percentage). This is just like medicare part B. I often wonder if the media gets this or is just going off half cocked and jumping to conclusions, which it appears is how they get their exercise.
rdan, Bruce, and coberly,
I was wondering what your take on the seeming focus on SS vs looking at the real disasters of medicare/medicaid? SS in comparison to those two programs is the definition of efficiency and good government. Is it becuase that’s were the money is?
Islam will change
LOL…take it up first in open thread right next to this one on SS said the sly fox with a grin. Then we can develop a post in a day or two. Meanwhile I have Thoma and Angry Bear 2005 in reserve addressing particular proposals.
In the open thread I would rephrase the question somewhat, but I understand the intent.
“If a substantial group of workers and retirees no longer could expect a benefit then this could work to undermine support for the program. This would be especially likely if a means test was gradually expanded through time so that workers further down in the income distribution began to see cuts in benefits. “
Long time readers of AB can identify with the comment from the report quoted above and, perhaps, can see a bit of “Leninist Strategy” in it. Also, erosion of the “clawback cap levels” over time, as has happened in other tax law, effectively will leave a yearly mess to deal with. Anyone who scans Internet chatter knows that there is a relentless drum to younger middle class professional workers that the existing bend points are stealing their money (riches in the markets) and giving it to deadbeats who had low paid jobs because they failed in life.
One of the major things that even current law does not address is differing costs associated with where a retiree lives. A person with $40,000 in New Jersey may be worse off than a person with $30,000 in Texas. No one ever considers the actual impact by appropriately considering the subsets of people affected.
Also, without universal health care, there is no way to means test in an intelligent manner. A person could have a small amount of deferred savings that they squirrel away for a rainy day and they fall under the means test. The second they face a major medical problem and are forced to declare a rainy day, the clawback kicks in just at the moment that they NEED the money. (Note the 85% means test has been shown to raise a retiree’s effective marginal tax rate enormously under the same conditions and now we are considering raising it even more???? Talk about “killing granny”!).
I’ll let others talk about the slippery slope to welfare. It’s obvious.
Dan said: ” some commenters indicating a ‘tipping point’ of disaster soon to come and saying Social Security needs to be a focus of this move to prevent disaster.” Dan, as far as I can rmember no one has made this starment. I am the last to mention a tipping point, but that was never linked to SS being the focus of the fix. That focus was due to the hyper-sensitivitry to SS shown by many of the commenters when the more general term entitlements was referenced.
I will get back after reading the referenced article.
Means testing is part of the ideologic assault on the social security system. Small wonder no foundation in reducing outlays.
Means testing is not applied to DoD why should it be applied to SS recipients?
From today: http://www.gao.gov/products/GAO-11-363T
“Three major impediments continued to prevent GAO from rendering an opinion on the federal government’s accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) federal entities’ inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.”
More later in open thread.
a progressive pay out schedule is no more means testing than the insurance company paying for a loss according to the size of the loss.
means testing is when you have to go to the government proctologist every few months and prove you don’t have any hidden assets.
it gets ugly. and the smart people who know how to game the system will get the money, and the rich people who are paying for it will cut the benefits until they won’t buy more than cat food.
the problem is that the evil bastards are conflating Social Security with “rising medical costs” in order to stampede the public into cutting Social Security. And it’s not the money. They just really hate the idea of poor people being able to say, “No, thank you, I’ve saved up enough to retire and I’d really rather do something more meaningful with the rest of my life than polish your shoes.”
about the “where you live.” i think that if you live in New York you probably made more money and have a higher benefit based on that more money. SS can reasonably assume that if you got by on 20k per year before you quit working, you can get by on, say, 15k. But if you “got by” on a 100k before you quit working you might need, say 25k, to make ends meet.
And if that doesn’t do it, you can always move to Oregon.
IT’s not “hyper sensitivity”… it’s trying to keep you from shifting the focus to another problem. I can solve SS “problem.” I cannot solve the medical costs problem. The Big Liars want everyone to think that the medical care problem requires that SS be fixed. It does not. And on Angry Bear you are usually leading the charge to keep people confused about this.
Is there any progressive supporter of higher SS benefits for low income seniors proposing a means test on SS benefits?
If not, can’t means testing be a priori written off, like Wisconsin’s goverors subjecting teacher but not police and fire unions to limits on collective bargaining, as an attempt to weaken public support for Social Security as a prelude to drastically limiting everyone’s benefits in the program?
I guess I saw the two associated in comments but perhaps not directly linked by statement. But if there is a tippping point so close, my statement stands in general. Krasting appears to say this saying press hard on all fronts including SS.
So if you did not, sorry to put words in your mouth.
poll shows “the people” favor “means testing.” they don’t know what it means. they think it means that Bill Gates won’t collect millions of dollars in Social Security that they have to pay for.
as long as they think that “means testing” doesn’t need the support of “progrssive supporters of higher SS benefits” do be a dangerous idea that need to be shown up for what it is.
so not “written off” but explained… and yes, it is an attmept to weaken public support for SS as a prelude to drastically limiting everyone’s benefits.”.. which they pay for themselves.
I think a great majority of Americans would support means testing if there were no loopholes or shelters. However, we can probably agree that any change to SS will have those aspects to them. Means test sheltered annuities or municipal bond funds will spring up to benefit the incredibly wealthy so they can continue to collect while the ‘upper’ middle class person is stuck in No Man’s Land.
Anyways, means testing won’t be passed while Biden is in office, nor will there be any curtailment in the pension he’s drawing from currently.
I understand that you paid more but if both are on the subsistence end of the economy, one earning more because the subsistence end is higher. Remember the tax is a fixed rate but the payout is not. That doesn’t change the fact that it takes more to survive in the higher subsistence level environment after retirement. Poverty levels, done more locally, vary quite a bit. It costs a lot to move to Oregon. I know since I just moved to Washington. Why should people have to migrate away from their main support, their families, anyway?
cent21, I’m not sure what a “progressive supporter” is but the Clinton agreed to clawback at the 85% level is a means test. Also, I think Orszag and Diamond, when Orszag was at Brookings, seemed to be advocating a greater redistribution to lower incomes. I would imagine that many progressives consider means tests as viable options.
But, as the report shows, means testing must reach pretty far down in the income level to have an impact and that impact is may not be very beneficial.
Elite progressives might tend to support means testing since it “takes care of the poor” but doesn’t raise the general fund taxes to pay back the the trust funds as fast since they would be effected by rising general fund rates.
I don’t understand your last sentence. Means testing, not the opposite, would erode support. Those Tea Party protesters aren’t from the lower income and many would likely be affected by the means test. They definitely don’t want to be “cheated” by the SS and Medicare rules any more than they already perceive themselves to be. They hate redistribution down the income ladder. I can’t figure out if they hate or love redistribution up the ladder though.
I don’t know that they should. But I don’t live in a high income area. I think you are unreasonable to expect Social Security to solve all of your problems, or all of the problems of the poor. It does what t does very well. There are other ways you can solve the rest of your problems.
always the busy squirrilly little minds looking for a way to increase their share.
SS works fine the way it is. Means testing of any kind would kill it. You don’t need to “soak the rich”, you don’t need to solve every poor person’s problem with no inconvenience to themselves.
SS provides you with a way to save part of your income safe from inflation or market losses or personal bad luck and provide enough for you to live on. Don’t ask it to do more than that.
CEPR shows that means testing won’t accomplish a damn thing to reduce costs to SS… and that’s without even looking at the costs of administering the means testing bureaucracy. And do you think you are going to like proving to the bureaucrats that you don’t have some money you are not telling them about?
you can keep your benefits at the present replacement rate at the present retirement age by just raising your “tax” that is the amount you save by 40 cents per week per year. That will pay for you to live an extra two or more years without forcing you to work an extra two or more years.
But. hell, that’s just too simple. Lets soak the rich. Lets try to get a better deal for “me.” After all, why shouldn’t the people in Alabama pay a higher tax so I can live in Massachusetts.
And this is how they beat you folks. You get greedy and envious and can’t think in a straight line.
Accepted! There are several potential tipping points. The treasury bond interest rate/failure to sell is the most evident at this point. Climbing interest on the federal debt is another, and inflation/hyper-inflation is even another. Moreover, a combination/perfect storm is possible.
If any of these things happen, saving any program, SS not withstanding, will be problematical. That’s been the point of most conservatives. Fixing the problems of SS is minor.
Raise taxes, means test, raise the eligibility age, or any combination and more will work to protect the SSTF. When we are in a better economic position, we can then draw on that fund, but not now. That means lowering the wage taxes in good times makes sense. Wait, wait, that’s Keynesian.
Views that disallow similar strategy discussions …
So you think a wealth tax ala France is what they mean. Given that we can’t catch foreign bank accounts now, it would cost more. Much more likley is an income based means test because we have a bunch of them now, so the additional cost is small. All the info for an income based means test is on the 1040 for use in the SS calcualtion right now, so the additional cost would be small.
“you don’t need to solve every poor person’s problem with no inconvenience to themselves”
Exactly. If I want to spend more in retirement (because I am going to live longer or just because I want to) then I need to be part of the solution.
I am not rich by any means, but I and my wife have earned a good buck at our jobs and we have been frugal–we bought less house than we could afford, did not take lavish vacations, did not drive fancy cars etc. Instead we saved and put our children through college, dumped money into 401Ks–I know and got a tax break–bought some mutual funds in good years and let the money sit. We also have paid a good deal into the social security trust fund and if we die early we are not going to lament that we did not get “our money back”. I will however be seriously upset if my social security is reduced because our withdrawals from the 401Ks along with dividends from the mutual funds and interest from our cash savings push us over some government defined level of income. Increase my taxes fine–if I make more I pay more, but do not punish my wife and I for being responsible citizens for the last 40 years.
it’s not a means test. It’s a deduction on your income tax. The difference is you don’t have to go to the proctologist to prove you don’t have hidden assets.
i can see why Rdan “puts words in your mouth”. It is so hard to tell what you are talkng about. but it looks tome like you are still conflating SS with the budget deficit. SS can pay for itself forever and have no effect on the budget whatsoever. And its the bad guys who keep trying to confuse you about that. Looks like they have succeeded.
The only “fix” that protects SS, as opposed to kills it, is to raise the payroll tax a tiny amount to reflect the higher costs of living longer. And there is no need to protect the Trust Fund.. .that is just an accounting detail.
Seems odd that you would want to draw on “that fund” especially in good times. The damn thing was invented to be drawn on in bad times. You put money in the bank for a rainy day, see.
And lowering wage taxes in good times is the opposite of Keynesian.
you got it. SS is protected savings. That is a huge good deal. Trying to make it cover all the evils that flesh is heir to is one way to kill it. The other way is to means test it… take it away from the people who saved their money and give it to those that didn’t.
It’s one thing to proved a little welfare (not SS) to people in dire straits. It’s another to design a regular, predictable, stage in life as .. The Welfare Years.
Dale said: “Seems odd that you would want to draw on “that fund” especially in good times. The damn thing was invented to be drawn on in bad times.” Well, we’re drawing on it in today’s bad times, and it’s not helping either the SSTF nor the overall deficit. We must borrow to pay for thoseSSTF special Treasury redemptions, ansd that borrowing adds to the overall deficit.
No matter what the law says, it is not the way the actual deficit is calculated. Notice, i did not use “Budget” in that deficit description. The budget is a projection, and political, and the actual deficit is a tracking mechanism for measuring federal government overall revenues and expenditures.
I’m not saying they should change anything. I am saying that a means test that goes too low or erodes over time will hurt more.
drawing on the SSTF in bad times would not “help” the TF. it’s not supposed to. it’s supposed to draw down the TF in order to make up for the missing tax revenue.
nor would it be expected to “help the deficit.” again, the point of a trust fund is to use the money to get through the lean years.
the problem you are having is that you spent the corn during the fat years. and you are trying to blame that on Social Security, with a logic that i would suspect was your own, but I see too many congressmen who seem to have read the same talking points memo.
don’t mean to give you a bad time. i just need to be as hard on the left as i am on the right.
a means test of any kind will hurt. and it will go too low over time.
“On net, a means test would appear to be a dubious way to reduce the cost of Social Security.”
That seems to sum up the argument. Who is there out there that can provide a logical argument to contradict Baker’s conclusion? It’s an excellent post with little need for commentary.
Taken together with the report by James Galbraith before the Congress the path to responsible economic growth seems reasonalby clear cut. Write your congressional representatives before you write another word here. And be sure to bring these points to your friends and cohorts and remind them that the current crop of congressional representatives owes more to corporatism than to the people that cast the votes.
From the report:
A means test that phased out benefits at 20 cents for each dollar of additional income over $40,000 of non-Social Securtiy income would save the program 4.65% of annual benefits.
20 cents is not a very significant phase out. If the phaseout were 40 cents, the program would save 9.3%. At 60% it would save 14%. At 80% it would equal 19%, (still leaving the lowest earning affected retiree an income in excess of $40,000 per year).
This would save from $70B to $140B in the first year, and $1.5T to $3T over the next 10 years. This is a very significant chunk of change. For example it could retire the TF. It might push out the SS depletion date by 50 years.
People, I can make you a means-tested SS program that will reduce or eliminate payments to the vast majority of people who paid into the system by the simple expedient of means-testing savings and liquid resources. Got more than $10K in savings, CD’s, money market funds? Or how about two houses? Or two cars? Or a pension other than SS? No soup for you!
With the stroke of a pen, I can make the TF go on forever because no one will ever get a nickle of SS. And, the millionaires will never miss it. I am the person here who has experience in administering means-tested programs. Trust me, you don’t want anything to do with them when you retire. It’s amazing how rich you are when I am looking at your little RV and telling you it’s gonna take away your SS and even if you sell it, the proceeds of the sale will keep your checks stopped for 6 months. We should get real about this. Rich guys don’t need SS, but if they’re eligible, who cares? What we need is social insurance for the rest of us. You know, the non-millionaires. Nancy Ortiz
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Note that if you report your muni bond interest it does appear in the formula to determine if social security benefits are taxable. Since all brokerage houses now report the muni bond income on the 1099-int unless you do your investing outside the US you will have your muni bond interest reported.
no it would advance the SS depletion date by 50 years. SS will pay back everyone who pays into it without a means test. with a means test it won’t pay back what you paid into it. that’s depletion.
you aren’t “saving” any money if you take it away from people and don’t give it back.
Interesting report. I’m not sure what to make of it. Dean concludes this is a dead end. But he also shows how 4% could be saved.
I think that SS is short revenue of ~$25b a year. This number rises each year at about the rate of growth in the economy. This really is not that much money. On a net present value it is probably not much more than Coberly’s plan of 40 cents a week tax increase and rising every year. His plan back ends things. Mine front end things.
If you accepted this and asked, “What do we have to do to fix that hole?” then a means test should be considered. We need ~4% savings. Dean’s table 3 gets you there.
A few questions/comments:
-On the income numbers that drive this. Is this taxable income? Adjusted Gross Income is one way to look at income. But this number excludes lots of things including tax free income (muni income). It is adjusted for standard deductions. I would like to see the calculations based on top line income. (Muni income is ~150b a year, a reasonable chunk of this goes to +62 year olds)
-The analysis looks at 2009 data. Can we see a longer period, or a different set of assumptions? 2009 was a very unique year in our history. We had ZIRP (zero interest rates). The income to all savers fell as a result. What would have the numbers been if we used an interest rate assumption that matched the SSTF forecasts? A static look at 2009 is a starting point. But to judge a mean test you need to look at it going forward based on a reasonable set of assumptions. Using 2009 creates the least favorable result for the analysis.
I think some of the tax calculations need to be looked at. I don’t think the marginal rates are as high as those used here. Not for this age group. The tax on benefits is only on earned income. An actual pay check. It is not on unearned income. Most of the income for the SS set is passive, not active.
What would the results be if the cut off would be $125k? Above that 100% cut, below that 0% cut? Same question using $100k cut off?
Dean points to the thorny problem of folks moving income to avoid cuts. You may not believe me, but this is not as easy as you think. Managing income is actually hard to do. The markets are too unpredictable. Those that are on the cusp of the income cut would be better off if they defer income. But deferral does not mean that it does not catch up with you the next year.
Dean doesn’t want a means test to be considered because it will undermine the program long term. A means test would “socialize” the system. It would be unfair to those who paid into the system. Very potent arguments. Much more persuasive than the numbers themselves. But this can be fixed.
Say I am due 20k a year, but I make more than the cap from investment activity. I die at 75. I have lost $200,000. Give my estate a TAX CREDIT against estate taxes due equal to 125% of what I have given up. This means my estate pays $250k less in estate taxes. This approach costs SS NOTHING. Future year Federal revenue would be less, but who cares? Estate taxes are not a budget item. The laws change every year or so. The benefit of the tax credit goes to the next generation. It stays in the family. It is a reverse inter-generational tax.
Would something like this make a difference in how a means test is perceived? I think so. As Dean points out, only a small segment of the population would be affected.
i can’t really follow your argument, but would you agree that yours is a whole lot more complicated than raising the payroll tax forty cents per week each year?
i don’t like the idea of “only a small segment of the population would be affected.” Politically it is easier, to be sure, to rob “only a small segment” at a time. But it stinks. and after they rob Peter they will come back to rob Paul.
You are still trying to turn Social Security, a savings plan, into a welfare plan. And that stinks.
Buff to cut to the chase exactly zero of this argument is about economics. Part of the opposition to Social Security is rooted in Calvinist derived ideas about the deserving vs the undeserving poor, another part in Hayekian inspired ‘Road to Serfdom’ fears about collectivism, and a good part of it is simply about pissing on the grave of ‘class traitor’ Franklin Delano Roosevelt.
As to why the focus is on Social Security and not Medicare, it is because in the latter case all the actual dollars are flowing to doctors, hospital chain owners/administrators, and insurance companies. Meaning that cutting costs might mean decreased services to the ‘undeserving poor’ but will certainly mean less money flowing to the bottom line of Republican leaning constituencies. Most of the savings in Medicare in the ACA bill will be the result of cutting the 14% premium paid to insurance companies running Medicare Advantage plans and curbing the rampant fraud in the medical device industry. Cutting the cost growth in medicine means cutting the income of the Country Club set, never a part of the Republican agenda.
You say the same thing every time. And I respond in predictable fashion. Your plan is dead. Drop it.
There is NO PLAN that addresses the problem that starts with tax increases. I am trying to look at “what can we do?”. You say, “We must raise taxes”.
Take the tax increase solution off the table and what do you get as plan B? Means test has to be on the list. You can cry till you’re blue in the face. it won’t change a thing. Taxes for SS are not going up. If that is tried it would be the death of SS.The outcome would be much more certain than the consequences of a means test.
Maybe the answer is to revise the tax codes in some substantion way. Maybe the government should start representing the best interests of all of its citizens rather than only the financial interests of the wealthiest citizens. I wonder BK, do you really know more about such an issue than the people listed at the bottom of James Galbraith’s report, http://www.angrybearblog.com/2011/03/sensible-tax-reform.html, to Congress concerning tax reform. That’s the unspeakable issue in this Congress, tax reform that asks people of great wealth to take part in supportiing thier country.
times cbs poll shows that workers prefer a tax increase to a benefit cut.
the hysteria about “no tax increase” is part of the Big Lie.
the reason for the tax increase is to pay for the tax payers longer life expectancy. what is it about paying for what you get that you dislike so much?
Why do you think I support a means test for heavens sake? Because it is borne by the wealthy. Those that did very well over the last 25 years. Get it??
I am attempting to preserve the benefit structure as it is today and proposed for the future. Except for the top 10%.
But I give these folks that I take away from a tax benefit for their children.
This is the most “populist” approach to the problem as one could have. Yet you folks make me out a demon.Think through your position. I’m I taking money out of your pocket, or putting it in? For most of you, I’m putting it in.
PS check out latest from CBO. They have a bunch of suggestions of what to do. Including taxing ALL benefits.To AB readers: What would you prefer? Tax on ALL SS benefits? Or just a steep tax on the top 10%??
why do you think I oppose a means test for heavens sake? because it will destroy Social Security by turning it into welfare. Get it?
I don’t make you out a demon… today… I make you out someone who doesn’t understand Social Security and why it works. You think of it as welfare, as government money. It is none of those things. it is a (forced) savings plan for workers where their savings are protected from inflation, market losses, and personal bad luck. It doesn’t cost the government a dime.
I don’t want you putting your damn money in my pocket. That’s the whole point.
It doesn’t make sense to tax SS benefits at all. There is no need to. SS is not in trouble. It isn’t broke. It doesn’t contribute to the deficit. If workers are going to live longer they will need to pay (save) a little more of their income… about forty cents per week more each year.
As is often the case with these seemingly great ideas there are unintended consequences. First, Social Security is already taxed so the money saved is that much less the current tax rates. Second, I am sure they are basing their income statistics on “household” income and not individual. Most of the retiring boomers who are married are getting or expecting two Social Security checks. If a marriage penalty is factored in that would reduce benefits for being married many would simply split assets and get a divorce. Thus reducing expected savings further. Finally, those now working will start to calculate how much they can save before they get to the income”threshold” and then just stop saving. Many too will decide to take early benefits to lower the annual income cap. In the end it would only save around 1%. Factor that in with the costs of compliance and it would barely be a break even. If people want to stick it to Bill Gates they should just apply the payroll tax to investment income.
i think you are not realizing that we should means-test elderly benefits not only by annual income, but also by assets.
there’s no need to ask the young to subsidize inheritances of those that are upper-middle class and above. sorry folks! time to get real.