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 1/3^rd 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.

This plan is what is wrong with Washington.  No one in Washington wants to fix Social Security; they just want to find a way to pay for it.  This plan is not reform.  It is reshuffling the same cards, doing what Washington does best: moving money from pocket to pocket.  What Washington doesn't understand is that this solution is how we got into the mess, not how we can get out.

Washington is not even looking at the right problem.  The solvency of the system is not the root problem.  It is a symptom caused by a more serious disease.  The real cause is the poor economic returns of Social Security which cause people to flee the system.  The Simpson-Bowles plan treats the symptoms with a cure that makes the disease worse.  

 The plan is virtually a complete replay of the past 70 years.  It cuts benefits of future generations.  It raises taxes on the high-income earners.  It increases the number of people who must participate.  And it makes the system more progressive by giving more money to Americans who may or may not be low-income.  It makes one recall Will Rogers who said, "Just because stupidity got us into this mess, doesn't mean that stupidty can get us out of it".

The majority of this plan is benefit cuts and more taxes.  This approach will lower the economic return of the system, thus encouraging more Americans to avoid the system.  Washington thinks the system is mandatory.  Wages are not mandatory.  People can choose to work less.  They can choose to take more benefits.  They can choose to take stock options instead of cash.  This isn’t evasion.  It is avoiding a system burdened with incompetence.

The tax increases in the plan are narrowly focused on a small number of Americans, high wage Americans.   As taxes increase, the cost of American workers goes up.  As that cost goes up, employers shift work overseas.   Fewer jobs and more avoidance is not the answer to the problems of Social Security.  These are the cause.

This plan will make the system even less appealing to younger workers, and the plan compensates by forcing more workers to join.  Washington just doesn't get it.  Until this system is a good investment, no one will participate willingly.  How many people call Social Security and ask to make a deposit?  No one does.  This is the problem - and this plan does exactly zero to improve the system.

This plan does nothing beyond juggling dollars between pockets.  It doesn't fix the investment policy of the Trust Fund.  We continue to ask more of workers and give less to retirees so that the Trust Fund can continue to be poorly invested.  In 2010, Social Security took your money and invested it in 2 7/8% bonds.  In all likelihood, you didn’t do that with your money.  Your congressman didn’t do that with his money.  Why should we continue to penalize American workers just so that the Trust Fund can be so poorly managed?

Instead of asking whether Social Security is effective at distributing welfare, this plan increases the progressive mandate of Social Security.  This plan increases the minimum benefit to 120% of poverty level for current voters.  So the logic of the plan is to take money from people who ARE in poverty and give it to people who are well above poverty.   Ironically enough, when we take money from younger workers in poverty, we increase the likelihood that these people will be in poverty at retirement.  So are we creating poverty or curing it.  Washington does not care about this question because it is beyond the next election. 

Mind you, there is no proof that we are curing poverty today.  The plan would increase the minimum benefit to people who were formerly low-income Americans.  Understand these people may continue to be low-income, but there is no guarantee of it because Social Security has no visibility who is and who is not low-income.  Social Security is a poor tool to distribute welfare because the system has no idea who is in need.  

The Simpson-Bowles plan asks Social Security to increase its mandates at a time when its solvency is in question.  It expands what Social Security does not do well.  So how does this fix the system?