Politicians of both parties have advocated means testing of Social
Security benefits. This could be done by reducing benefits based on
(1) income at retirement
(2) wealth at retirement
(3) lifetime earnings
I wonder how means-testing would work. Have there been specific
proposals from politicians and think tanks? If Social Security is
means-tested, the affluent could decide to
(1) work and save more, to make up for reduced benefits
(2) work and save less, because means-testing effectively punishes
them for saving
I wonder which effect would predominate.
Social Security is ALREADY means tested. The higher your income from other
sources -- including interest from so-called "tax-free" muni bonds -- the
more tax you pay on your Soc Sec. That is, the less you receive.
The current Social Security wage base is $106,800. Up to this limit the
percentage withheld is exactly the same.
But, on receiving benefits, one gets a disproportional return;
Earnings Benefit %Replaced
20000 11349 0.57
25000 12949 0.52
30000 14549 0.48
35000 16149 0.46
40000 17749 0.44
45000 19349 0.43
50000 20949 0.42
55000 21946 0.40
60000 22696 0.38
65000 23446 0.36
70000 24196 0.35
75000 24946 0.33
80000 25696 0.32
85000 26446 0.31
90000 27196 0.30
These number were calculated for a post I wrote, using the SS web site's
equation for benefits. The taxation is another phaseout effect.
To spin this further, assuming the 80% replacement ratio, the 90K earner
still needs to save 12.5X final income to replace the 50%, while the 45K
earner needs about 9.25X to replace 37%.
For the current workers with say 10 years to go, trying to plan a
retirement target date is tough not knowing how much of that SS is going
to be there. From the above choices, I only see (1) (income at
retirement) as viable, tracking wealth itself is tough, and lifetime
earnings don't always result in any wealth at all.
OK, but the politicians are talking about FURTHER means testing of SS,
and my question is how this might be implemented. Some analysts have
written that SS is less progressive than it may appear from the
numbers you have given, because life expectancy is positively
correlated with income, so that the person who earned $20,000 annually
will likely collect benefits for fewer years than a higher-earner.
The convoluted equation produces a phase-in. An effective 47.5% rate for
someone otherwise in the 25% bracket. As much as I like simplicity, I'm
hard pressed to produce a method that doesn't look like some crazy step
function, e.g. above $X income your SS is taxed 100%. Open to
suggestions on that.
The problem with means-testing SS based on current income is that rich
retirees can shift their money to assets producing little income. If
the logic is that the rich don't need SS, it does not make sense pay
SS benefits to someone with $1 million in non-dividend paying stocks
but cut off someone with a $1 million in stocks paying dividends of
$50,000 annually. A simple way to reduce benefits for the non-poor
would be to stop increasing benefits paid based on previous earnings.
For example, in the table you showed, keep benefits at $20949
regardless of how much income was subject to payroll taxes. I wonder
how much that would save. Are there statistics on how many people fall
into those income bins?
Btw I am not saying I support means testing, but I would like
politicians to be more specific about what they are advocating.
I think that 50% is the right number for all.
Your contribution the Social Security is done with after tax dollars
making it like a Roth whose distribution is not taxed
Your employers contribution is not taxed to you making it like an IRA
whose distribution is fully taxed.
The really poor would escape taxes because they are not required to file
A quick google search for "Social Security Benefits Means Testing" returned
PAGES of results.
You are quite correct, there are various proposals floating around that
would determine the amount of Social Security Benefits PAYABLE to a
recipient based on what their other income is. I don't know for sure, but
the most straight forward approach - since the two agencies already share
info - would be for SSA to use the information from LAST YEAR'S return to
see if you were rich enough that you didn't "NEED" your full SSA benefit.
There is also some talk about using means testing to determine how much the
costs for Medicare would be to retirees. Again, the more you make, or are
worth, the more they'd charge you for Medicare.
Couple this will a benefit phase out and you hit the TRIFECTA -
A) taxed on benefits that were intended to be tax free;
B) receiving reduced benefits because you have significant other income;
C) increased cost for Medicare coverage because you have significant
So the question then really is - why should "I" work hard and pay into the
system to start with? If they're going to reduce my benefits and increase
my costs because I was smart enough to work hard and save, why shouldn't I
just ride the system like everyone else? - FYI - this is a snarky criticism
of the system, not an actual recommendation.
Gene E. Utterback, EA, RFC, ABA
I oppose means-testing for programs in general. It adds administrative
cost, encourages cheating, is "unfair", and creates disincentives: many
people are loathe to leave a welfare program if the net gain from
employment is small.
To abandon means testing would not mean subsidizing the rich. To the
contrary, taxes (on the rich!) would increase to pay for the non-means
But this is only rational thought. In post-modern America the lunatics
have taken over the asylum, and all we can hope for are solutions which
are the least irrational among those proposed. In that context, a
simplistic plan to save a few hundred billion dollars will doubtless
gain traction despite that, as Duckster's link points out, it's just
another wrong solution to another misdiagnosed problem.