How Not to Fix Social Security

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Social Security Some people figure that we can “fix” Social Security by implementing a means test where we would not pay out Social Security to individuals that do not need it.

A paper by CEPR debunks the myth by explaining that a means test  Below is the executive summary. The full article is here.

  • The vast majority of Social Security benefits go to relatively low and middle class people. More than 75 percent of benefits go to individuals with non-Social Security incomes of less than $20,000 a year. More than 90 percent of benefits go to individuals with non-Social Security incomes of less than $50,000 a year.
  • A means test that phased out benefits at the rate of 10 cents for each dollar of additional income over $40,000 of non-Social Security income would save the program 2.77 percent of annual benefits, assuming no behavioral response. It would save 0.74 percent if the floor for the means test were set at $100,000. After accounting for the lost tax on these benefits, the savings for the two means tests would be 2.18 percent and 0.58 percent of benefits, respectively.
  • A means test that phased out benefits at the rate of 20 cents for each dollar of additional income over $40,000 of non-Social Security income would save the program 4.65 percent of annual benefits, assuming no behavioral response. It would save 1.33 percent if the floor for the means test were set at $100,000. After accounting for the lost tax on these benefits, the savings for these two means tests would be 3.66 percent and 1.04 percent of benefits, respectively.
  • If individuals respond to the 20 percent phase-out means test by reducing their income in the relevant income brackets by 30 percent, then the savings from the two means test would fall to 3.84 percent of annual benefits for the means test that begins at incomes of $40,000 and 0.85 percent of benefits if it only affects incomes above $100,000. After accounting for the lost income tax revenue on these benefits, the savings would be 3.02 percent and 0.67 percent of the program’s benefits, respectively.
  • A behavioral response to a means test would also reduce income tax collections. Assuming that the average tax rate on income for the affected individuals is 25 percent, the behavioral response described above would mean that the net savings to the government from a 20 percent phase out of benefits for incomes over $40,000 would be 2.01 percent of annual benefit payments. If the threshold is set at a $100,000, the savings would be 0.07 percent of annual benefits.
  • The cost of administering a means test would add substantially to the operating cost of the program. If the means test raised the expense ratio for the retirement program to the same level as the disability program it would increase expenses by an amount equal to 1.70 percent of the program’s cost. This would eliminate most, if not all, of the savings from a plausible means test on affluent beneficiaries.

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One Thought to “How Not to Fix Social Security”

  1. The smart retirees learn as much as they can about retirement investments, realistically assess their ability to shoulder risks and then engage the services of a financial professional to help them design a plan and monitor it in motion.

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