Weekend Question 1: Why Are We Discussing ‘Means Testing’ Government Benefit Programs? (Social Security)

UPDATE: Thanks to Porkbusters.org for picking up this post!
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Part 1 of 3: Social Security (this post)
Part 2 of 3: Medicare
Part 3 of 3: College Financial Aid

A TCS Daily article by Jeffrey Alan Miron, identifies five ideas for reducing federal spending and the budget deficit that he believes liberals as well as conservatives should support.

Two of them, cutting agricultural subsidies and reducing earmarks, make plenty of sense. The other three involve “means-testing” government programs, under the implicit assumption that they somehow give benefits to the well-off to which they really shouldn’t be entitled and which they can “afford” to pay for on their own.

There’s only one problem: All three of the programs mentioned (Social Security, Medicare, and federal financial aid) already have significant means-testing built into them, and, if anything, need less means testing, not more.

This post covers how Social Security is already means-tested — TWICE.

First, the more you make, the less of a benefit you get during retirement compared to what you paid in.

Upper-middle income people get less income replacement in retirement than those with lower middle incomes. Someone earning an average of $25,000 per year (inflation-adjusted) during the course of their working career retiring a Social Security’s “normal” retirement age will receive an first-year retirement benefit of about $12,000 (it goes up with inflation after that). But someone making $60,000 will get a first-year benefit of about $18,000. That’s 50% more, but the higher-earing person paid more than twice as much into the system during his or her working career, since the Social Security tax is a flat 12.4% of earnings (6.2% from the employer, 6.2% from the employee). If this isn’t means-testing, I don’t know what is.

Second, middle- and upper-income earners have to pay federal income tax on anywhere from 50% to 85% of their Social Security benefits, while those who rely primarily on Social Security benefits for retirement income pay none.

Specifically, if you file an individual federal tax return and your “income” (defined in a pretty complex formula — nothing’s ever easy with federal income taxation) is between $25,000 and $34,000, you will have to pay federal income tax on 50% of your Social Security benefits. If your “income” is above $34,000, 85% your Social Security benefits will be subject to income tax. The analogous amounts for joint returns are between $32,000 and $44,000 for taxation of 50% of Social Security benefits, and above $44,000 for taxation of 85% of benefits.

All amounts noted are NOT indexed for inflation, meaning that in each successive year a greater percentage of retirees is paying at least some income tax on their Social Security benefits (it was about 30% of retirees 12 years ago; now it’s over 50%).

(Aside: To illustrate how arbitrarily written the law is — if your “income” as a single person is $24,999, none of your Social Security benefits are subject to federal income tax. If your “income” is $25,001, half of it is. If your benefits were $12,000, with $2 in higher reported income, you’d have to pay income tax of typically 15% on $6,000 of your benefits. $2 in additional “income” costs you $900!)

There may be an argument for not taxing the benefits of those relying heavily on Social Security, but there’s no denying that taxing those who are better off in retirement is a form of means testing.

I suggest that two forms of means testing represents quite enough “progressiveness.” Reducing benefits paid to well-to-do-retirees during retirement, which Miron proposes, while the other two forms of means-testing remain in effect, would be nothing short of punitive.