One of the hot topics of debate in this election year is how to keep Social Security solvent. Every presidential candidate dreams of being the one to save Social Security, so you can be sure that we will be hearing a LOT about Social Security between now and November.
Many strategies have been suggested to save Social Security, but one that is getting a lot of attention is the proposal to do means testing on Social Security, which basically means to reduce or eliminate benefits for people with higher incomes.
Wikipedia provides a much more detailed explanation and history of means testing. According to Wikipedia…
A means test is a determination of whether an individual or family is eligible for help from the government.
In the United States, means testing has historically been related to debtors to determine if they have sufficient financial means to pay at least a portion of their debts. The bankruptcy courts use means testing to determine if a person is eligible for bankruptcy and which chapter they qualify for – Chapter 7 or Chapter 13 bankruptcy.
Means testing has also been used in the United States to qualify people for programs such as Home Relief (during the Great Depression) and the Food Stamp program which was introduced in the 1960s.
Means testing was first proposed as a way to help solve the Social Security funding crisis by Ross Perot in 1992. However few political candidates have suggested it since then; not surprising since it could alienate potential voters and campaign contributors who might be affected by such a proposal.
While this strategy has brought more criticism than anything, there are some supporters. The main purpose behind means testing is to stabilize Social Security over the long term. It is suggested that by eliminating benefits to people with high incomes, Social Security will stay solvent longer.
In Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, written by Stuart M Butler, Alison Acosta Fraser and William W Beach, it is proposed that payments are reduced for people who earn more than $55,000 a year, and that payments be eliminated for people who earn more than $110,000 a year ($165,000 for couples).
As you can imagine, there has been a considerable amount of criticism regarding the proposal to do means testing, especially by those who would have their benefits reduced or eliminated as a result.
Perhaps the biggest criticism is that means testing would turn Social Security from an entitlement program to a welfare program. As all working Americans know, Social Security is funded by payroll taxes. When Social Security was created, President Roosevelt wanted it funded by Americans so that benefits could never be taken away. Implementing means testing would mean that people who contributed to the program their whole career(s) would not see benefits (or would receive reduced benefits). This would effectively turn Social Security into a welfare program.
Others argue that the cost to implement means testing would be greater than the savings. Right now the costs to administer the retirement program are relatively low. If means testing was implemented, the cost would rise dramatically, possibly greater than the savings from reducing or eliminating benefits for higher earners.
Another issue with redistributing benefits from the wealthy to the poor is that it would reduce people’s incentive to work. If you are close to retirement and you know that your income could cause you to lose benefits, why bother working? Or why bother saving if by doing so you eliminate your chance to receive benefits? As a tax preparer I see this criticism played out in real life all the time. People who receive the earned income credit (EIC) know exactly how much they can earn and still receive the credit; if it looks like they will earn too much, they simply stop working. If people stopped working, or worked less to avoid losing benefits, this could hurt the future of Social Security even more.
Opponents to means testing argue that Social Security is already progressive, so adding means testing may not result in the savings suggested by proponents of this strategy. According to Dean Baker, a co-director at the Center for Economic Policy and Research (CEPR), the majority of Social Security beneficiaries are lower to middle income people. Mr. Baker goes on to say that the number of beneficiaries who are by most standards are considered affluent is too small to raise a significant amount of money via means testing.
“The bottom line”, according to Washington Post’s Allen Sloan, is that “Social Security is already seriously means-tested, without having made a point of it. Mr. Sloan suggests that we fix Social Security’s real problems, not this imaginary one”.
As you can see there is considerable opposition to the idea of means testing, at least beyond what means testing is already being done. Opponents advise that there are other ways to help keep Social Security solvent.
Strategies that have been suggested to improve the stability of Social Security include:
- Increasing payroll taxes, either the percentage or the wage base or both,
- Increasing the retirement age so that people have to wait longer to collect full retirement benefits,
- Increasing taxes on Social Security benefits for people who have other sources of income (such as pensions, investment income, or even wages for those who continue working after reaching full retirement age), or
- Changing the inflation factor used to calculate benefit increases each year (to the Consumer Price Index instead of wage inflation)
I expect to see a lot more debate on this issue as we get closer to November. What are your thoughts on using means testing as a way to keep Social Security solvent? What other strategies would you propose to help save Social Security?
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