Means Testing For Social Security

In order to make this timely I am cut and pasting a note from CEPR pointing to the efficacy of cutting spending in the Social Security through means testing. The MSM and politicians have proposed this and raising the retirement age as answers to ‘the deficit’ crisis, some commenters indicating a ‘tipping point’ of disaster soon to come and saying Social Security needs to be a focus of this move to prevent disaster.

Such answers can be examined one by one in this particular forum since luckily the format can offer respite from the political power plays of the moment and posturing from ‘friend and foe’ alike. Since means testing is in the media, let’s look at the numbers. Please read the 14 page document first, and then come back with comments. I apologise for not commenting in particular on the topic but cannot today.

Means testing, or reducing Social Security payments to affluent beneficiaries, has been touted as an effective way to reduce the cost of the program. A new report from the centre for Economic and Policy Research (CEPR) examines the feasibility of several different means testing scenarios and finds the potential savings to be rather limited.


“The majority of Social Security beneficiaries are lower- to middle- income people,” said Dean Baker, an author of the paper and a co-director at CEPR. “The number of beneficiaries who are by most standards considered affluent is too small to raise a significant amount of money via means testing.”

The report, “The Potential Savings to Social Security from Means Testing,” first describes the distribution of Social Security benefits by income level. The authors then look at the effects of phasing out benefits at rates of 10 and 20 per cent of every dollar of non-Social Security income above $40,000 or $100,000 and find little in the way of potential savings to Social Security. The savings are even less when behavioural responses in the form of tax avoidance or tax evasion are factored in, since a means test would effectively be an increase in the marginal tax rate for wealthier seniors.

The data show that over 75 per cent of social security benefits go to individuals with non-Social Security income of less than $20,000 and 90 per cent goes to those with non-Social Security income of less than $40,000 a year as of 2009. If means testing that phased out benefits at 10 per cent were applied to those who make $100,000 a year and assuming no change in behaviour, it would only save Social Security 0.74 per cent of its outlays.

At a 20 per cent rate, this would only yield savings equal to1.33 per cent of costs. If the phase out were dropped down to $40,000, hardly wealthy by any standard, the overall savings would just be 2.77 per cent of costs at the 10 per cent rate and only 4.65 per cent of costs at the 20 per cent rate. Accounting for behavioural responses would lead to even smaller savings, could cut these potential savings by half or more.

Mean testing would also raise the cost of the program. The retirement program currently has very low costs. If the administrative expenses rose to the level of the disability portion of the Social Security program, the higher costs would likely exceed any savings from a means test.

On net, a means test would appear to be a dubious way to reduce the cost of Social Security.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.