Thursday, October 30, 2014
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Means testing? Why not just raise Social Security's tax base?

Calls for "means testing" for Social Security and Medicare raise the question: If you think wealthier people benefit too much, why not just ask them to pay more into the system?

Means testing? Why not just raise Social Security's tax base?

The always thoughtful Thomas Edsall has raised a question I've asked repeatedly myself: Why do so many of America's most prominent politicians, pundits, and deficit scolds, from billionaire Pete Peterson on down, call incessantly for "means testing" of Social Security and Medicare as a path to reforming those key entitlement programs? Rather than cutting what wealthier Americans collect in cash or medical benefits, why not just ask them to pay more to support these crucial old-age programs that benefit the entire society?

To put it more bluntly, why is one dollar out of your pocket different from another dollar out of your pocket?

In an excellent blog piece on the New York Times' website, the author and Columbia University journalism professor offers a wealth of data to illustrate the underlying economics and politics that explain this odd disconnect. He mentions the obvious answer, which I confess to having largely accepted: that means testing, by making the programs more like hated "welfare," will ultimately help undermine public support and lead to further reductions. Some conservatives have always considered Medicare and Social Security to be little more than "European-style socialism."

But another reason he's quantified is that - surprise! - the wealthiest 5 percent of the nation, who pay less than the full rates in payroll taxes that the rest of us pay, would lose less from Social Security cuts than from raising or eliminating the income base subject to those taxes.

Edsall writes:

[W]hile both means-testing and eliminating the $113,700 cap on earnings subject to the payroll tax hurt the affluent, the latter would inflict twice as much pain.

The C.B.O. estimates that elimination of the payroll earnings cap would cost the well-to-do the equivalent of 0.6 percent of Gross Domestic Product, while substantially reducing Social Security payments to the top third of the income distribution, through means testing, would only cost those better off recipients the equivalent of 0.1 percent of G.D.P.

From Congressional Budget Office report, Edsall pulls out an interesting coincidence:

The Congressional Budget Office estimates that the amount of new revenue required to bring the Social Security trust fund into balance over the next 75 years would amount to 0.6 percent of G.D.P.

The same C.B.O. document presents a series of alternative ways to achieve such a goal, including the elimination of the current $113,700 cap on income subject to the Social Security payroll tax. If the cap or ceiling were lifted, the amount of money raised would be 0.6 percent of G.D.P., the exact amount of income needed to get Social Security out of the red — a striking coincidence.

Edsall doesn't offer similar data for the difference in how more Medicare means testing might affect the wealthier elderly. Medicare is already funded by broader taxes on all earned income. Under Obamacare, taxes on higher earners will rise, and unearned income will for the first time be added to its tax base (details here). And Medicare already has some means testing built in, as Paul N. Van de Water of the Center for Budget and Policy Priorities points out here.  Still, given that the wealthy are used to getting the best in medical care, it's a fair bet that some of them make outsized use of Medicare spending.

But Edsall isn't suggesting that this is all about the distribution of costs and benefits across the income scale. It's about how we pay for these universally beneficial programs - old-age cash and medical insurance - that you'll be entitled to no matter how much bad luck or how many bad investment decisions you've made during your life. That's what social insurance is for.

And it's about how we discuss the programs' finances - and some key facts  that often get lost amid the noise.

Email Jeff Gelles at jgelles@phillynews.com.  Follow him on Twitter at @jeffgelles.

Jeff Gelles Inquirer Business Columnist
About this blog

Jeff Gelles, who writes the Inquirer's weekly Consumer 14.0 and Tech Life columns, takes a broad look at the marketplace of goods, services, and ideas.

Reach Jeff at jgelles@phillynews.com.

Jeff Gelles Inquirer Business Columnist
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