Means-Testing No Answer for Social Security

March 10, 2011 at 4:50 pm

A new Wall Street Journal/NBC poll shows surprising support for “means-testing” Social Security — in other words, reducing or denying benefits to retirees with incomes above a certain level — to help close the program’s long-term funding gap.  But a new analysis by the Center for Economic and Policy Research (CEPR) confirms that means-testing would yield very little in savings … unless we took benefits away not only from rich retirees, but also from many who are solidly middle-class.

The reason, as the CEPR analysis shows, is that there aren’t enough rich retirees — and they don’t collect enough in Social Security — to make much of a difference.  Only 2 percent of Social Security benefits go to retirees with other (non-Social Security) income of $100,000 or more each year.  (See chart.)  Only about 10 percent of benefits go to people with outside income of $40,000 or more a year — a figure that most of us would regard as middle class.

Social Security benefits are modest even for the highest-income retirees.  The average retired-worker benefit is only $1,175 a month (about $14,100 a year).  And because the program has always capped the amount of earnings — currently $106,800 — on which workers pay taxes and accrue benefits, even its top benefits aren’t lavish.  Someone retiring at age 65 in 2010 could get, at most, $2,192 a month (about $26,300 a year); only 5 percent of retirees collected more than $2,000 a month.  So although some rich people get Social Security, nobody gets rich from Social Security.  That limits how much we could save by taking it away from them.

Means-testing would also penalize people who planned prudently for their senior years.  Income security during retirement is often likened to a three-legged stool — consisting of Social Security benefits, employer pensions, and personal savings — sometimes supplemented by part-time employment.  Reducing Social Security for people whose non-Social Security income is higher because they built up savings during their working years or take a part-time job would sap incentives to work and save.  It would also create strong incentives for retirees to understate their income or reshuffle their assets to avoid the benefit reduction.

A further problem with means-testing, as CEPR and the American Academy of Actuaries point out, is that it would add a major administrative burden to Social Security, imposing costs that would eat into the benefit savings.

In short, taking Social Security benefits away from high-income retirees wouldn’t save much money and would unnecessarily alter the program’s philosophy and administration.

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More About Kathy Ruffing

Kathy Ruffing

Kathy Ruffing is a Senior Fellow at the Center on Budget and Policy Priorities, specializing in federal budget issues.

Full bio | Blog Archive | Research archive at CBPP.org

7 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. David #
    1

    “Means-testing would also penalize people who planned prudently for their senior years.”

    PENALIZE them? When affluent working people are denied public assistance, we don’t call that a “penalty.” Why should denying public assistance to affluent retirees be any different? If they’re self-sufficient, they don’t deserve welfare.

    The core question is fairness. Social Security benefits are transfer payments from current workers to current retirees. How is it fair to tax a minimum-wage worker and transfer that money to an affluent retiree? Seems to me the penalty is on the side of the low-income taxpayer, not the high-income retiree.

    It won’t do to reply that affluent retirees have “paid into” the system and thus are entitled to collect benefits. They did no such thing. They paid a tax that went directly to Social Security beneficiaries.

    That “paid into” fiction is part of the monstrous lie of Social Security. Your “investments” (payroll taxes) over the years are the payouts for prior “investors.” That’s why it is entirely accurate to call Social Security a Ponzi scheme.

  2. GrandInquisitor #
    2

    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.

  3. 3

    THE S.S. TAX should be applied to L.T.Capital Gains Income and also extended to income in excess of $250,000. Why Not? We do not understand why C.G. income ( 1 yr + ) deserves such special tax treatment while people who actually have to “work” to earn their basic necessities pay, usually such higher rates.
    The affluent have already received much reduced rates of tax; plus a significant inheritance tax exemption, is it now $5,000,000 ( In additon to the pass thru-trusts ? Is this correct?

  4. John Thacker #
    4

    “Reducing Social Security for people whose non-Social Security income is higher because they built up savings during their working years or take a part-time job would sap incentives to work and save.”

    I certainly agree, which is why I would favor an alternative approach of altering the benefit formula to decrease the Social Security payouts to those who earned more during their working years. There’s no reason why people who saved rather than spent during their working years should be punished; any sort of means testing should fall equally on those who saved and those who spent.

  5. Michael B. Sullivan #
    5

    It seems to me that 2-10% of Social Security outlays is, in fact, a huge deal and major savings.

    Outside the realm of fantasy, nobody’s actually going to be cutting federal outlays more than 10%, and Social Security is a genuinely big-ticket item. Even cutting 2% from Social Security and not touching a single other budget item would be a more serious spending cut than 90% of all Congresspeople have ever proposed.

  6. Richard Unice #
    6

    An item in today’s FactCheck.org states that their information on SS running a deficit was correct, that the SS Trust Fund was just filled with promissory notes, and not actual funds. This same statement was generally made by the Washington Post columnist, Charles Krautheimer. Yet figures from the SS website appear to indicate that income is still slightly ahead of expenses.
    To the layman, both interpretations appear plausible. Which facts are real?

    • CBPP #
      7

      As we pointed out, FactCheck focuses on the Social Security flows excluding interest—which means that it ignores a huge chunk of the program’s income. The Congressional Budget Office projections that both we and FactCheck cite clearly indicate that the program is still running a surplus, totaling $72 billion in 2011. Updated projections from the Social Security Administration — which will appear in the annual Trustees Report in a few weeks — are expected to show similar figures.

      As we’ve explained at greater length elsewhere, Social Security’s cash flows have suffered during the deep economic downturn, and that affects the Treasury’s borrowing needs. But the program is still running a surplus. And Social Security has no authority to spend more than it has collected, over time, in taxes and interest. By ignoring interest — and effectively dismissing the trust funds’ holdings of Treasury securities as worthless — FactCheck has unfortunately strayed into presenting its opinion as fact.


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