"We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions . . . . With those taxes in there, no damn politician can ever scrap my social security program."
- President Franklin D. Roosevelt
Perhaps the most brilliant stroke of political genius in the establishment of Social Security was the payroll tax. At its core, Social Security was and is a promise to the American people: If you pay into the system then you earn the right to guaranteed benefits. That's each and every American who can work to pay into the system, regardless of need in retirement. That promise has been fulfilled for the past 75 years and can continue to be until 2037, according to the 2010 Trustees' report, with no changes to the system.
Why this structure was such political genius was that it created an investment--social, political, and financial--on the part of every American, which every American will then reap. That investment, particularly the political investment, cannot be overrated, and explains why Social Security has been considered the Third Rail in American politics for seven decades. And why shouldn't it be? It's far and away the most effective and successful government program in the nation's history. It's so well-loved, every modern Democratic president (including the present one) seems to be laboring under the misapprehension that if he is the one to "fix" it forever, he will be revered by a grateful populace forever. (The Republican ones clearly want to do away with it.) Except almost every plan for "fixing" it forwarded thus far will ultimately weaken it.
That includes the idea of means testing, or reducing or eliminating benefits for wealthy individuals. On the face of it, it sounds almost progressive. Why should the well-off get the same benefits as everyone else? They don't need them, why shouldn't that money be redistributed to those who need it more?
The simplest answer is that it's their money, too. They paid into the system and, in doing so, bought into the same promise as the rest of us. Which gives them the same incentive to support the program as the rest of us. In their 1999 book, Social Security: The Phony Crisis, Dean Baker and Mark Weisbrot address this.
The justification for denying benefits to people who have paid taxes into the system is also questionable. We do not deny interest payments to wealthy owners of U.S. Treasury bonds, for example, and it is difficult to see how the payment of Social Security benefits to rich senior citizens is any less appropriate. Indeed, why single out senior citizens as a group for special treatment in this regard? If we think that the rich are getting too much of the economic pie, then they should be taxed more--not just the ones who happen to be over 65.
It's important to recognize, though, that there is already a progressive earnings test built into the system, in that higher income retirees pay income tax on a portion of their benefits, and lower-wage earners get a higher return on contributions. In that sense, income fairness exists already in the program.
Exchanging that basic fairness for means testing Social Security would take away that "legal, moral, and political right" of all Americans to collect their pensions. It turns Social Security from what is essentially an insurance program into welfare. Which in turn would deeply erode political support for the program. The constituency for any aid program is far less powerful than the constituency for Social Security--the whole of the American workforce, and those with money are the most powerful.
There are other, simply practical reasons, to reject the idea of a means test. Primarily, there just aren't enough wealthy seniors to achieve significant savings by reducing their benefits. Use the cut-off level of $250,000 for the definition of wealthy. With roughly two percent of all tax filers in the US claiming that level of income, the percentage of seniors in that bracket is insignificant.
In fact, the administrative costs for the Social Security Administration (SSA) in trying to make income determinations, measuring need, and policing the system would be significant--potentially outweighing any savings in benefits. Take the example of Medicaid, which is means tested. Significant administrative resources have to be devoted to determining assets, and policing would-be recipients trying to hide those assets in order to qualify.
There's a compelling argument that means testing would also serve as a disincentive for retirement saving. AARP's executive vice president for policy make this argument.
Imposing new limits for the well-off could backfire in various ways. A means test could adversely affect retirement planning and lower the personal savings rate if people concluded the program would penalize them for having higher retirement incomes or larger nest eggs. It would discourage older persons from continuing to work beyond eligibility age, depriving them—and the economy—of additional money. It would create incentives for people to take lump-sum distributions from pension plans, strategies that could prove shortsighted and harmful.
What makes more sense than penalizing older Americans for their wealth--after they've paid into the system--is to tax them more while they're earning. Don't decrease or eliminate their benefits from a program they've paid into--increase their contribution to the program while they're earning. As of this year, Social Security taxes are paid on about 86% of an individual's earning, up to $106,800. Earnings above that magic $106K mark are not subject to the payroll tax. What does that mean?
[A]s currently constructed, a person with a gross income of $10,000 will have $620.00 withheld as Social Security tax from his check, with the employer paying a matching $620.00. A person with $110,000 of gross income in 2010 pays Social Security tax of $6,621.60 resulting in an effective rate of approximately 6% which is lower than the 6.2% rate paid by those who earn less than $106,800.00. An individual earning a million dollars a year in wages will pay the same $6,621.60 in Social Security tax (resulting in an effective rate of approximately 0.66%), with similar employer matching.
Does that strike anyone as fair? Those earning the most money end up paying a dramatically lower percentage.
Getting rid of this inequity in the system makes much more sense for the long-term stability of Social Security, and would incidentally, go a long way toward assuring its sustainability beyond 2037. Raising, or eliminating, the payrolll tax cap is going to be a massive political battle, given the potentially disastrous two percent payroll tax holiday the Obama administration agreed to in last year's tax cut deal. Republicans have already said they'll never allow that tax to be "increased" again. How the administration will extract itself from that bad deal, and restore or even increase the payroll tax will be a real measure of Obama's political abilities, and will to do what's right.
That it is the right thing to strengthen Social Security is hardly arguable, unless you're a Pete Peterson afficiando who wants to see the program demolished. Strong majorities of Americans, even bipartisan majorities, in poll after poll, want to see Social Security maintained and strengthened.
Social Security is one of very few lasting American institutions in which we're all in it together. That's been the strength of the program all along. It's not worth undermining that for the meager savings means testing could achieve.