Many solutions in Washington today include a ‘means-test’, which makes the entitlement of Social Security contingent upon income or wealth. For example, the Heritage plan would ‘limit Social Security to those who need it”. Columnist Charles Krauthammer wants a means test for Social Security “so that Warren Buffett’s check gets redirected to a senior in need.”
The country needs to understand that this idea does not fix Social Security. It changes the purpose of the Social Security system. It shifts resources of the system away from insurance and deploys them as welfare. In doing so, means testing will foster the exact conditions that Social Security was intended to prevent.
These plans never advertise that the system already is means-tested. Warren Buffett’s check is already reduced by the income tax code. According to the Social Security administration, nearly 1/3rd of all seniors have their checks reduced. The income tax is applied progressively to seniors who have outside means. The income tax that is collected is returned to the Social Security Trust Fund – so the net effect is seniors get reduced benefits based on means.
While it is a benefit cut, means-testing will act like a tax. This change will shift the payroll tax from a bad investment to purely a tax. Today some people get back as little as .40 cents on the dollar of contribution, but it is .40 cents. When means-tests are applied, the worker will get back zero. So the entire 12.4% of payroll taxes becomes a tax. It is a significant tax because it is focused on a narrow group of people without the benefit of deductions, exemptions, or credits.
The problem here is that this tax will overtime provide a significant disincentive to save for retirement. What is the point of saving in a 401K, when such savings will reduce your Social Security benefits? As you means test Social Security, you will see a reduction in retirement savings. So we are changing Social Security from a system which augments retirement savings to one that discourages retirement savings.
This policy also provides a disincentive to work. It doesn’t take a great imagination to gather what would happen if Mr. Krauthammer’s check was redirected to a writer in need. No doubt there are many writers such as myself who would support that policy. But Mr. Krauthammer wouldn’t continue to work. And in like manner, some workers would retire earlier as they lose incentive to work. Early retirement isn’t an answer to the problems of Social Security – it is a cause of the problems.
The reality is worse than the theory. In practice, means testing is that tax is focused narrowly on the specific group of Americans who are uniquely positioned to avoid it. The means-tax affects people who have means. They have lawyers and accountants who are deftly able to move income from pocket to pocket in a financial game of 3 card monte to ensure that America’s wealthiest appear to be less wealthy.
This tax should trouble all Americans about Social Security. It suggests that our leaders do not understand the most basic rules of economics. People do not like taxes. The Heritage Plan is heavily dependent upon means-testing to keep Social Security paying checks. They do not believe that people dislike taxes. They literally assume that people will continue to work and save without regard to what they get back. They assume that people will not hire lawyers and accountants to preserve their wealth from taxes. What should trouble Americans is that no one questions these plans - provided that the plan has a fancy name and a colorful document with lots of pages.
There is a sense of comedy here that is lost on Washington. If the system runs out of money as an insurance product – what chance of survival does it have as a welfare system? And if that isn’t absurd enough, understand that mean-testing introduces incentives to create the exact conditions that Social Security was designed to prevent. But it fixes Social Security through the next election which is what Washington cares about.
