Means-Testing

Endorsement

 We think means-testing is about as bad an idea as any in the market.  It makes a system that designed to lower the likelihood of poverty-ridden old age, into one that encourages it. 

The point of means-test is to extend SS for people who do not have outside income.  It doesn't fix the system though.  It is shifting deck chairs on the Titanic so that we can make room for more passengers, who don't swim very well. 

What Do The Trustees Say

The Social Security Administration provides limited research on means-testing.  It offers only one assessment (B7.7) in its "Solvency provisions".  The change would extend full benefits by about 0 years.  Over the longer term, the report says that the change will erase about 9% of the 75 year shortfall.  The research is from 2014 which will overstate the results somewhat. 

How Does It Work?

The concept works by lowering the benefit level to those who have substantial outside income.   Individual plans vary a lot.  Here is the one example that the Social Security Administration has scored - it has a lot of moving parts. 

Reduce individual Social Security benefits if modified adjusted gross income, or MAGI (AGI less taxable Social Security benefits plus nontaxable interest income) is above $60,000 for single taxpayers or $120,000 for taxpayers filing jointly. This provision is effective for individuals newly eligible for benefits in 2020 or later. The percentage reduction increases linearly up to 50 percent for single/joint filers with MAGI of $180,000/$360,000 or above. Index the MAGI thresholds for years after 2020, based on changes in the SSA average wage index.

 

Social Security already has a means-test.  The revenue collected by IRS taxation of benefits is returned to Social Security and Medicare. 

Strengths

It reduces benefits levels which makes the system last longer.

Weaknesses

The single biggest weakness of any mean-tested program is the threshold and inflation.  If the threshold is static, the rules will over time lower the threshold to lower benefits of people in poverty.  This is what has happened to the taxation of benefits (see full article)

This change turns a system which was designed to lower the statistical likelihood of poverty ridden old age, into one that fosters it.

Distortions

Supporters will tell you that it reduces the benefits of those who don't need it.  Social Security has no visibility into need. 

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