Means Testing Social Security

We support means testing social security because if provides a method to save social security without onerous taxes.  Another way to think of it is that means testing is a fairer deal for those who test out.  That is, “the return on investment” of social security for successful people is very low and often negative.  Testing out mean that you miss the taxes and perhaps the returns.  If you get the choice of higher taxes or testing out, pick test out.

At NRO and Bloomberg Ramesh Ponnuru says

The kind of means-testing Christie is proposing [based on current income] would discourage people from saving for retirement, or working in retirement, when we should be encouraging both. But we can avoid this problem by basing means-testing on lifetime income, which Social Security already uses to calculate benefits.

Ponnuru has a point that using current income is a problem but the problems he suggests don’t seem significant.  Do we think that wealthy individuals will forgo savings to create a $16,667 a month annuity to get a $2,500 a month annuity?  It looks to us like Christie’s proposal to phase out social security from $80,000 to $200,000 range gets the incentives close to right.  Why do we want individuals to work in retirement?  Perhaps Ponnuru is thinking about the marginal cliff for people that work.  The real issue is that we want people to be able to plan the financial issues related to retirement.

Lifetime income has some attractions but it has more shortfalls.  To take an extreme example, what about Mike Tyson?  He has made millions but but gone bankrupt.  Even folks that invest may invest poorly.  Secondly, social security taxes are only levied on certain types of income.  Do you remember John Edwards?

Means testing social security is a great idea.  A phase out process as Christie has proposed is a critical part of means testing.  How to test means is extraordinarily difficult.  A single test might not be sufficient.  The best system would not require repayments of social security.


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