Ross Douthat's Trojan Horses – Means Testing

Ross Douthat lays out the components of what he calls "sensible Social Security reform": shifting funding from a dedicated payroll tax to general revenues (the main push of his column), "means-testing for wealthier beneficiaries, changing the way benefits adjust for inflation, [and] a slow increase in the retirement age."

There are three very bad ideas here, and since the thrust of his article is that Social Security is an unbearable assault on the sensitivities of the conservative mind, one suspects that the one arguably good idea – changing the way benefits adjust for inflation – is just thrown in for show. [But maybe we should regard it with more suspicion!]

The three bad ideas may sound reasonable to people of good will (from whom Mr. Douthat is excluded, by the way), but problems become evident when we look at them more carefully. This post will address means-testing. You can't say you weren't warned.

Something similar to means-testing was part of Social Security from the very beginning. Social Security retirement benefits were regarded as "retirement insurance." Insurance does not pay you if you do not suffer a loss, and this retirement insurance was intended to replace some of the income "lost" through retirement. If you have not retired, this reasoning went, you have not suffered a loss. Thus, the original Social Security Act contained a provision that "Whenever the Board finds that any qualified individual has received wages with respect to regular employment after he attained the age of sixty-five, the old-age benefit payable to such individual shall be reduced, for each calendar month in any part of which such regular employment occurred, by an amount equal to one month's benefit."

This was called the monthly earnings test, and strictly speaking was not means-testing, of course, although by no coincidence most retiring persons suffered a diminished ability to pay their bills. A retiring wealthy person, however, was as entitled to receive his/her Social Security benefits as a retiring person with little or no savings. This was intentional in that it gave high wage earners a continuing stake in the program. After paying Social Security taxes during their work life, they are as entitled as the next man/woman to receive a retirement check, regardless of how successful they have been financially.  Social Security beneficiaries thus bear no stigma as welfare cases. Rather, their benefits are rightly regarded as "a reward for steady work," as Mr. Douthat contemptuously refers to them.

The monthly earnings test has changed over the years. Most recently, by a unanimous vote in both houses of Congress, it was eliminated in 2000 for persons who had reached "full retirement age" – traditionally age 65, but gradually working its way up to 67. Whether this was a great idea is arguable, but it was certainly popular with our Congressmen.

So despite the monthly earnings test Social Security is not a welfare program. It is a "social insurance" program created in the depths of the Depression by people who understood the vagaries of life all too well. Its benefits are a compact between generations. Means-testing Social Security would fundamentally change that. Means-test Social Security and you have just created a welfare program, the beneficiaries of which will be stigmatized. Your parents, for example.

You.

But there are other, very practical reasons to reject means-testing. For one, means-tested programs are several times more costly to administer than simple social insurance programs. Is it necessary to add that additional administrative expenses equate to less money available to be paid as benefits?

Consider this comparison of Social Security and Supplemental Security Income. You know what Social Security is. You may not know about Supplemental Security Income (SSI), a federal, means-tested program for the aged and disabled. Although the benefits and administrative expenses of SSI are not paid from Social Security trust funds, both SSI and Social Security are administered by the same agency. To apply for SSI, you go to a Social Security Office. The manager of the Social Security Office is also the manager of the SSI program administered by that office. At the level we're talking from, there is no essential difference.

Now consider this: the cost of administering the non-means-tested Social Security program in 2009 was 0.9% of total expenditures, while the cost of administering the means-tested SSI program in the same year was 7% – nearly 8 times higher!

Another problem with means-tested programs is that, because people's economic circumstances often change, they have much higher payment error rates.  Compare the 2011 Social Security payment error rate of 0.6% with the SSI payment error rate of 9.1%.

Between the additional administrative expenses and the higher payment error rate, we have just reduced by 15% the trust funds available for payments to the taxpayers. A great idea this isn't.

Of course, Mr. Douthat would be pleased with this arrangement because he is a person with a "philosophy," and his philosophy dictates that regardless of whether Social Security works (an apparently immaterial concept) it is undesirable because it is government doing things for people they should be doing for themselves. Means-testing Social Security is just a step toward stopping the government from doing that.

Like it all worked so well before Social Security.

Social Security is not in dire trouble. Modest changes will put it back in actuarial balance for the next 75 years. In fact, you can do it yourself here.

Coming up, more Trojan horses: funding from general revenues and another increase in the retirement age.