Means-Testing Social Security

The status of Social Security has become increasingly uncertain in the past few decades. Due to the program’s benefits outweighing its income, Social Security is due to be insolvent by 2033. The program has continuously taken beatings from financial crises, including the Great Recession and recent COVID-19 pandemic. America’s political scene has been fraught with debates on how to ensure Social Security’s future, with ideas across the political spectrum ranging from increasing the payroll tax which funds the program to levying strict cuts to benefits. An idea that garnered modest popularity in the early 2010s was imposing a means-test on Social Security recipients. A means-test can be defined as an assessment of an individual’s income and assets. The intention of applying a means-test to Social Security would be to reduce the program’s cost by eliminating benefits for particularly affluent recipients. While the appeal of such a policy is easy to see, the cost of administering a means-test on Social Security would heavily limit any potential savings from applying one. Coupled with the fact that highly affluent individuals receive only a small portion of Social Security benefits, means-testing Social Security would be an ineffective solution to preserve the program.

Social Security was first introduced as part of Franklin Roosevelt’s New Deal in 1935. During this time, the poverty rate for senior citizens was over 50%. The program was designed to keep people from spiraling into poverty and included retirement benefits, unemployment compensation, a public assistance program, and aid for the disabled elderly. In the years following, Social Security became increasingly universal for those over the retirement age. By the 1970s however, the program faced financial troubles, prompting modest reforms. Due to risings numbers of welfare recipients, conservative welfare restrictions were implemented in the 1980s under Reagan’s administration. One program that did not fare as well was the Aid to Families with Dependent Children program, which was created under the Social Security Act. Reagan imposed a means-test to AFDC, requiring recipients to be no more than 130% above the poverty level. In the twenty years since, means-tests have become increasingly commonplace for welfare programs, particularly at the state level. Social Security has not become subject to a means-test and data suggests imposing one to the program would be widely unpopular (79% of Americans oppose reducing the size of Social Security benefits, per a study done by the Associated Press). However, Social Security insolvency remains a pressing issue, with two of the program’s major trust funds set to run out of money in the next ten years. Social Security also faces an ongoing demographic challenge, with data from the US Census Bureau suggesting that Baby Boomers are soon to make up the vast majority of retirees. Social Security represents the largest single source of government spending, and while it is widely acknowledged that reform to the program is needed in the coming years, any proposed cuts to Social Security would likely be deeply unpopular amongst the American public. Policymakers face a difficult situation with regard to Social Security’s future.

This is where the idea of means-testing comes in. The argument is understandable, as it wouldn’t make sense to be giving benefits to the wealthy when there may not be enough money to cover everyone. To expand on information in the previous section, many US states currently utilize means-tests to determine who gets aid. This is made possible due to welfare reform under Bill Clinton’s administration, which consolidated federal welfare into a single program (Temporary Assistance for Needy Families, or TANF for short) and gave states full oversight on how to distribute aid. Numerous states subsequently subjected their welfare programs to means-tests in the hope of saving funds. The state of Texas, for example, denied 90% of applicants who applied for TANF funds. This resulted in Texas sitting on over $281 million dollars in welfare money, a trend mirrored throughout the nation, as a cumulative total of $5.2 billion dollars meant to be spent on aid to the poor was unused. Critics of means-testing have pointed out that state governments have chosen to leave millions of dollars unspent instead of giving aid to those in-need. Perhaps the growing opposition to the policy is why proposals of means-testing Social Security have dissipated in the past decade or so, but it is worth noting that Social Security is not like TANF or the Supplemental Nutrition Program. Social Security was designed as a social safety net to prevent poverty for the elderly, and not aid based on need. As a program designed to be universal, the argument for means-testing Social Security is different. The program’s impending insolvency may also re-lend itself to the means-testing argument. So how would means-testing affect Social Security, and could it save the program money without harming those who rely on its benefits?

In short, the answer is no. Because individual benefits are capped, (The maximum benefit for 2023 retirees stands at $3,627), 75% of social security benefits go to individuals with non-social security incomes of $20,000 or less, with 90% going to those with $50,000 or less. Due to this, affluent recipients don’t receive much more than the average worker does in Social Security earnings, and any means-test to Social Security directed predominantly at the upper class wouldn’t save a substantial amount. A study done by the Center for Economic And Policy Research found that a means-test that phased out benefits at a rate of 10 cents for each dollar of additional income over $40,000 of non-social security income would save the program 2.18% of benefits, while a test that phased out benefits at a rate of 20 cents would save 3.84% of benefits. These are both fairly significant tests aimed at individuals considered very much middle-class. When further accounting for the administrative costs of applying a means-test (The CEPR estimates it would increase the cost of Social Security by 1.7%), means-tests to Social Security would be unlikely to reduce the cost of Social Security without harming those who rely on the program. Economist Andrew G. Biggs also criticized a potential means-test to Social Security, claiming that means-tests would impose high marginal tax rates on recipients that would generate disincentives to work and save. The Social Security Advisory Board, appointed by Bill Clinton in 1994, reached a similar conclusion. The group stated “The fact that benefits are paid without regard to a beneficiary’s current income and assets is the crucial principle that allows — in fact encourages — people to add savings to their Social Security benefits and makes it feasible for employers and employees to establish supplementary pension plans. Moreover, means-testing would send the wrong signal to young people and wage earners generally. The message would be: ‘If you are a saver and build up income to supplement Social Security, you will be penalized by having your Social Security benefits reduced.’ This message is both unfair to those who work and save and creates the wrong incentives” Means-testing Social Security is clearly an ineffective strategy to lower the cost of the program and also harms the individuals who will become subject to such a policy. Any means-test to Social Security would have to be heavily targeted at middle and lower-class recipients to save significant funds, contradicting the intended purpose of a means-test.

Subjecting Social Security to a means-test is an ineffective strategy at preventing the program’s pending insolvency. Wealthy affluents simply don’t receive a large enough portion of Social Security benefits to where reducing or eliminating said benefits would save the program a significant amount. A means-test to Social Security would also fail to increase the program’s revenue, dreaming it an ineffective strategy in the long-term. This is all without mentioning numerous other problems with the policy. Means-testing creates an expanded bureaucracy for welfare recipients, whose lives may depend on getting aid in an expedient manner. Means-testing has also been used as a strategy to drastically cut welfare spending, as seen with state governments in Texas and Maine. Means-testing is a poor policy not only with regard to Social Security, but with welfare in general.