Bill Keller is a columnist for the New York Times. He recently wrote a column challenging his fellow baby boomers to support cutbacks in “entitlement” programs, i.e. Social Security and Medicare. He referred to boomers as the “entitled generation.” I dislike use of the term “entitlement” in this context because so many of its users throw it out as a pejorative against those who receive the benefits. Keller supports some form of Social Security “means testing.” Let’s talk about that for a moment.
Calling for means testing of Social Security retirement benefits is not new. I have thought about it quite a bit.
I believe that basing Social Security benefits on the financial wherewithal of the recipients is practically unworkable. For example, what “means” will be tested? Will it be your other income? If so, will it be taxable income or all income? Will income testing be applied monthly or yearly? Will gifts from family of food, services, or a place to live be counted?
Others have suggested that the “means” to be tested when determining Social Security benefit levels should be overall wealth, not income. Those with identical lifetime incomes could be treated differently by the Social Security system based on how disciplined they were in saving vs. spending. The excellent lifetime savers will find their benefits cut in favor of those who spent their money. If you finally own your home after years of mortgage payments, that could work against you when it is time to claim your retirement benefit. The government will say: “Congratulations for being so disciplined. We are going to reward you by cutting your benefits.”
Regardless of how the means are tested, a whole new industry of “means testing” manipulation will be created. Financial planners, lawyers, and Social Security “consultants” will become specialists in how to shield assets and/or income from the testing process. Lobbyists will attack Congress to obtain exemptions for certain sources of income or certain types of assets. A new bureaucracy of federal “means testers” will be formed to investigate us. Tax returns will take on new levels of complexity when we are required to fully expose our net worth to this new “Department of Social Security Means Testing.”
Does this sound like a good idea yet?
There is another problem with Social Security means testing: How would we accurately plan for our retirement? If our Social Security income will periodically vary based on other income and/or other wealth, tremendous uncertainty is introduced. If our other income or wealth is based on investment performance, our income cannot be accurately predicted. We will be even more at the mercy of the markets than we are now.
People just haven’t thought this through yet. When they do, they will see just how unworkable true means testing of Social Security benefits would be.
To Keller’s credit, he is not locked in to true “means testing.” In a follow-up interview, he suggests increasing the limit on how much income is subject to the Social Security payroll tax. I am actually OK with that, even though it is a tax increase. I am also OK with increasing the full retirement age, as long as it doesn’t apply to those of us who are already quite close to it.
But please take income or wealth-based means testing of Social Security benefits off the table, unless you plan to set the testing thresholds so high that only a small fraction of recipients will even have to care about it. Put the extremely wealthy in a special class of “don’t even bother to apply for benefits.” They won’t care, unless the market crashes like in 1929.
What is your take on the discussion of Social Security means testing?