Means Testing Social Security

| Wed Feb. 16, 2011 12:35 AM EST

Atrios says there's not much point in trying to save money by cutting Social Security benefits for rich people:

There's No Money In Means Testing

You just can't save any money worth the additional administrative burden by depriving a few rich people of their Social Security and Medicare benefits. There aren't that many rich people! Now, those not many rich people make a hell of a lot of money so you can raise revenue by increasing tax rates on them, but it isn't worth bothering going after their Social Security checks.

This is probably true. If you make the means testing stringent enough so it applies only to the genuinely well off, it wouldn't hit enough people to matter much. Conversely, if you make the means testing loose enough to matter, it would bite into a lot of ordinary middle class earners, and that's neither fair nor politically feasible.

Want some evidence? Well, it turns out that Social Security is already means tested: your benefit level is calculated as 90% of your first $749 in monthly pre-retirement earnings, 32% of earnings up to $4,517, and 15% of your earnings above that. This means that high-income earners get a smaller benefit as a percentage of their income than low earners do.

One way to means test even more would be to reduce the third "bend point" to, say, 10% of earnings above $4,517. This would decrease benefits for the well off without touching benefits for anyone else, and it's easy to do since the system is already built with this structure in place. In fact, this is exactly the recommendation of the Rivlin-Domenici deficit reduction report.

So how much does it save? Answer: $59 billion in 2040, which is a grand total of 1.6% of the savings in their entire Social Security plan. You could reduce the third bend point to 0% and it still wouldn't be more than a nit. And note that this starts to bite at an income of $54,000 per year, which is hardly anyone's idea of rich. Raise that limit even to upper middle class territory and you'll save even less.

So why bother? To save real money, you'd have to get way more drastic, which means not just a lower cap on benefits, but actually reducing benefits for anyone with even modest retirement savings, and that would have the unhealthy side effect of reducing incentives to save for retirement as a supplement to Social Security. I don't think anyone is up for that.

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