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?
Jeff Gelles, Inquirer Business Columnist
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.
Just do away with the cap. Problem solved--easy solution. Move on!— A. Martinez- Are you also going to eliminate the cap on now much you can collect? Because that's why the earnings cap is there. You only pay SS tax on a certain amount of earnings, but there is a limit to the amount you can collect, no matter how high your income was.
If you eliminate the cap on contributions, but don't eliminate the cap on the amount you can receive, then it is no longer a retirement insurance program, it is a welfare program.
Currently, the maximum one can collect from SS is $2,513 per month. If I pay in twice as much to SS as you, should I not collect twice as much as you in retirement? What you are saying is that I will pay in twice as much as you, but still only collect the same amount as you - a negative return on my "investment". Why should I support a retirement system that gives me a negative return? Would you stand for that with a pension plan or 401K?
- Eliminate the cap AND means test at the withdrawal phase.
The rich game the system so much that they always collect far more than they put in. Let's just reverse that obscenity and let those who can afford to pay actually pull their own weight instead of riding on the backs of workers who in reality produce the profits that make the rich so rich.
But, as long as the rich write the laws to benefit themselves at the expense of real people, people who actually do work for a living will continue to do all the work for none of the rewards.— JeffJenk - Let me start here:
1) I worked over 50 years and contributed to SSA for 50 years. I EARNED MY SSA BENEFITS.
2)No means test at withdrawal. It is an earned benefit. But tax it as the income it is. Set thresholds/brackets just like now. Include all income in the calculating the taxes to be paid including pensions, IRAs, 401Ks, ROTHS, etc, etc.
3) Raise the payroll cap to $250,000 and index it. Raise the benefit.
4) Treat all income the same. Romney made but did not earn, $42million in 2011. It was all capital gains taxed at <15%. He paid $0 - as in ZERO, none, nada, zilch - SSA taxes. But based on prior paid work he should get his EARNED BENEFIT just not income tax free.
5) With elderly bankruptcies on the increase from medical expenses an annual means test for eligibility to collect SSA penalizes those who spend assets during the year for health care. Tax at the end of the year to account for such extraordinary costs. Again this is an earned benefit that should not be denied.— nebulus - Jeff, the system that you are suggesting is welfare, a handout, pure and simple. That is not the intention of welfare. As pointed out by others, there is a cap on contributions because there is a cap on withdrawals. You can't remove one without removing the other. And if you are forced to pay into the system, you should be entitled to collect from it on the back end.
From your post, it is clear that you cannot provide for your own retirement, so you want those of us who exceed the cap to pay for your retirement while denying us the benefits that we are forced to pay for.
— jfar86 - The system Jeff is suggesting is called communism and it does not work. When I was a kid, I was just as naive. There should be a law that taxes, from any source, should never exceed 50% of anyone's income. Once you cross that threshold, you are a slave of the state. And that 50% limit includes all those little taxes buried in the cost of living like gas tax, sales taxes, real estate taxes, etc. — Themonkofmagdalena
- *To correct a typo in my earlier post: I meant to say that social security is not intended to be welfare. — jfar86
- It was my assumption that Social Security was a "forced" retirement program and not a "tax". Rich gaming the system? How? The only ones "gaming" the system are those that never paid into the "system" and the entire SupplementalSSI debacle. You wanna go after the rich; then alter the way that hedge fund managers and commercial bankers are taxed.— afrdmd
- A lot of so-called "professionals" proposed solutions to our financial problems. Some of them good, some of them bad and in between. I might agree with some of them, but what I would never do is trust CBO, or project any savings, based on the CBO's conclusions. It's the same organization that predicted that Obamacare would save us money, and many other predictions that would never materialize. So take all those numbers with the grain of salt.— hollandpa
- This proposal is just a disguised way to raise the highest tax rate by another 6.2% . If you eliminated the earnings cap, what diffence does it matter what they call it, you still would not get it as a wage earner. And the rich would still get around it by not having to pay this rate on their capital gains and dividends.— workin365
- Is it a tax or is it something else? FICA stands for something: Federal INSURANCE Contributions Act. It was supposed to be there as a safety-net for people who worked their whole lives but for whatever reason didn't save or have a pension, etc. Just like you pay your auto insurance in case you have an accident, we're supposed to pay into FICA in case we wind up broke at retirement age so that we can afford to eat and rent a small apartment (or we die while working and our surviving spouse and kids get some money). Why should high earners pay more in insurance than they need to? If you own a house worth $300K, would you pay $200K a year in insurance premiums on it?— Moe_Syzlak
- Here are two issues that no one has mentioned. First, disallow congress from using the money in the SSI account from being used for anything but SSI payments. Second, force all congresspersons into the SSI system, which they are currently exempted from.— hopster
- Hopster: Technically the US govt borrows from the SSA fund. It can not, by law, use SSA funds for operating expenses. However, I agree with our 1st point.
Congress is not exempt from SSA. They have been paying SSA taxes since 1984. Prior to that they were covered by a very generous pension plan.— nebulus - This is nothing more than thievery. If my neighbor and I work for the same salary and retire with the same size pension but I saved and invested while he gambled his away why should I be penalized for being thrifty? Had we both bought insurance policies for the same amount we'd both get equal payouts regardless of how much money we had in the bank. The part that should anger anyone who has paid near the maximum is that this is a forced program. You pay or else. Now there isn't even the assurance of receiving anything back on this "investment". You'd have been better off working off the books and saving for yourself.— Bob Calvin
- I love it. "Let's not put any thought or work into this. Let's just raise taxes."
Reach Jeff at jgelles@phillynews.com.
