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Retirement Planning > Social Security > Social Security Funding

Cato Scholar Makes Case for Means-Testing Social Security

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What You Need to Know

  • One Cato Institute analyst argues Social Security pays the largest benefits to recipients who need them least.
  • Experts at the Brookings Institution see things differently but agree a course correction is needed.
  • Points of agreement include raising the Social Security payroll tax wage cap and increasing the full benefit claiming age.

Romina Boccia, director of budget and entitlement policy at the Cato Institute, is deeply interested in the health and operation of the Social Security system, such that much of her professional work has involved analyzing the federal program and advocating for reforms.

Having joined the market-oriented Cato Institute in August, Boccia previously served a 10-year stint at the Heritage Foundation. In her current and former roles, Boccia has published dozens of blog posts, policy papers and in-depth analyzes of the health of Social Security.

It is from this background that she suggests that universal Social Security benefits might not be sustainable and argues that the program has been stretched far beyond its intended purpose. Left-leaning policy wonks, including Gary Burtless of the Brookings Institution, warn that means-testing Social Security benefits could have unintended consequences. But there are a few policy changes that could find support across the political spectrum, the two scholars say.

Boccia’s advocacy focuses both on criticizing what she considers to be wasteful, ill-targeted federal spending policies and on forwarding practical suggestions for improving — at least in her view — the fairness and efficiency of the Social Security system.

A native of Augsburg, Germany, Boccia tells ThinkAdvisor that her longstanding concern about the Social Security program is more than professional. In fact, Boccia’s focus on the key federal program can be traced back to her early time in the United States, when she worked as a home health aide for a young adult with disabilities, leveraging experience she gained while caring for her own mother in Germany.

“In addition to seeing the importance of stable, reliable support in the case of my own mother, the young adult I worked with here in the United States was a beneficiary of the Social Security disability insurance program,” Boccia explains. “The disability benefits were critical to their quality of life. So, this is not just an abstract topic for me. This is something that is very personal and which I take very seriously.”

Runaway Debt

In a phrase, Boccia says she is “deeply concerned” for the future of Social Security and its millions of beneficiaries — and indeed for the future fiscal health of the federal government in general. However, this does not mean she simply wants to see more money thrown at the Social Security program. Quite the opposite, in fact.

“The Congressional Budget Office projects a bleak outlook for the U.S. federal government’s finances,” Boccia says. “Publicly held debt is projected to reach 110% of GDP over the next 10 years, the highest level ever, and to continue rising thereafter.”

According to Boccia, depending on what direction Congress takes with respect to current tax policies that will expire in 2025, publicly held debt could reach anywhere between 185% and 260% of GDP over the next 30‐​year projection period.

“No matter how you look at it, U.S. fiscal policy requires a substantial course correction to stabilize the rising debt,” Boccia says. “Today, rising spending is primarily driven by the major entitlement programs. Medicare and Social Security are the primary culprits, such that, in my view, benefit eligibility reforms are inevitable.”

Boccia argues that Social Security’s benefits are poorly targeted, paying the largest benefits to recipients who need them least. Furthermore, she suggests, the benefit formula is so complex that most Americans have little idea of what they can expect from the program, making it difficult for them to properly plan for retirement.

“Several program features further encourage early retirement and reduced labor force participation among Social Security beneficiaries,” she adds. “These harm the economy and beneficiaries alike.”

Moving Away From Universal Coverage

Boccia believes Congress must modernize the Social Security program and ensure financial solvency without burdening younger generations with excessive taxes or debt. She says this is possible by better targeting Social Security benefits to those who need federal assistance — to those who cannot work due to disability or old age.

“The current universal coverage of Social Security is not sustainable under current and future demographic trends,” she warns. “A more targeted program would free up resources for working individuals to provide for more of their own retirement needs through private means.”

Boccia says Social Security has by degrees migrated away from its original goal of providing modest income support targeted toward individuals who live beyond the age of average life expectancy. The program is now viewed as a universal retirement paycheck program, which was never its intended purpose.

“Social Security today provides income support to practically all older Americans, regardless of need,” she says. “This makes Social Security an entitlement program, rather than an old‐​age poverty program.”

Ultimately, Boccia believes, Congress should means-test Social Security, returning to the program’s stated purpose of antipoverty protection in old age.

Chained CPI

Short of fundamentally refocusing the purpose of the Social Security program, Boccia says, more modest reforms could also make a big difference. For example, she says lawmakers should index Social Security’s cost-of-living adjustments to the more accurate chained consumer price index, as opposed to the Consumer Price Index for Urban Consumers and Clerical Workers (CPI-W). Boccia says this approach would acknowledge that people choose less expensive and different goods and services in response to changes in prices.

“According to the Social Security Administration, this reform would eliminate about one‐​fifth of Social Security’s long‐​term fiscal imbalance,” Boccia says. “This approach would more accurately protect the value of benefits from the impact of inflation on beneficiaries’ cost of living. The CBO last projected that adopting the chained CPI approach would save Social Security about $150 billion over 10 years.”

Payroll Tax Changes

Another change Boccia would recommend is to reduce the rate of the combined employer-employee Social Security payroll tax — currently 12.4% — while significantly raising or even eliminating the wage cap on which the tax applies.

“That approach would be more economically efficient, and it would actually provide tax relief to lower- and middle-income workers,” Boccia says. “The current system that sees higher incomes excluded from Social Security taxation has the practical effect of making the overall system much less progressive.”

Some Perspective (and Agreement) From the Left

Though his public policy viewpoints may differ substantially, Burtless, a senior fellow in economic studies at the Brookings Institution, shares Boccia’s passion for the Social Security solvency topic. His own experience with the topic goes back some four decades to when he served in the federal government, first at the U.S. Department of Health, Education and Welfare, and later at the Labor Department.

According to Burtless, Social Security is of such fundamental, practical and political importance to the average American citizen (and lawmaker) that many of the wholesale changes some experts advocate for seem untenable, even if they are appealing on paper.

For example, while means-testing Social Security to better favor lower-income people may seem like a progressive policy that would be appealing across the political spectrum, such a change runs the risk of undermining the basic viewpoint that all Americans have a stake in the long-term viability of the program.

On the other hand, Burtless says, the idea of raising or eliminating the wage cap for Social Security taxes is one area of relatively broad bipartisan agreement.

“My viewpoint is that no single fix is going to solve our Social Security solvency problem,” Burtless tells ThinkAdvisor. “We are going to need a combination of approaches and a significant degree of compromise, but a lot of people think a good place to start would be to address the wage cap.”

Burtless says his desire to see the payroll tax cap raised or eliminated stems from a basic economic fact that has emerged over the past four decades. Put simply, the amount of overall earnings enjoyed by Americans with wages above the current cap of $147,000 has grown exponentially in that time, meaning a significantly smaller portion of overall wages in the country are now subject to Social Security taxes.

“Nobody can debate that the income gap between people at the 90th or 95th percentile of earnings and the people at the 50th or 10th percentile has opened dramatically since the 1980s,” Burtless says. “This explosion of inequality was not really something that policy professionals foresaw when creating the current Social Security payroll tax framework. There is just so much income today that is exempt from Social Security taxation.”

This fact has apparently caught the attention of federal lawmakers, Burtless and Boccia note. One legislative proposal endorsed by President Joe Biden and currently circulating in Congress would reapply the payroll tax to wages above $400,000, “so the wealthy pay the same rate as someone earning $50,000 a year,” in the words of the president. Another proposal would set the taxable wage level significantly lower, at $250,000.

Beyond addressing the wage cap, Burtless says, there is also substantial agreement, given the meaningful increases in longevity since the 1980s, that some delay in the age of entitlement for the full Social Security benefit is in order, perhaps to 72 or 75.

“I think there is also some agreement that we could set up a fourth top tier for the highest income earners, wherein the marginal replacement rate for the wealthiest Americans coming from Social Security would drop even more,” he says.

Such an approach, Burtless says, would help to ensure that all Americans continue to benefit from Social Security while also acknowledging the current system has grown meaningfully less than originally intended.


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