America's fiscal need for entitlement reform is pushing the discussion about Social Security inexorably toward "means testing," a policy both the left and the right have long avoided. Both sides realize that means testing, namely reducing or eliminating payments from the program to higher income senior citizens, would recast Social Security from its current perception by citizens as a retirement program to one of outright redistribution or welfare.
Many Americans see Social Security as a savings plan, albeit a coerced one, and a recent poll by the AARP (which certainly knows how to write poll questions geared to suggest as much approval for the program as possible) shows wide support for Social Security with equally wide skepticism about the program's future.
The fact that it's seen as a savings plan, that it has been seen as such for at least a generation despite two Supreme Court rulings that Social Security payroll taxes are not savings, not investment, not insurance, indeed not anything other than another tax levied by government, suggests that means testing in any substantial way will require jumping a substantial political hurdle.
The hurdle has been lowered by the fiscal debacle created under this president and the last one, leaving a substantial subset of both parties ready to attempt to clear it. This despite the political risk implied by AARP's poll question asking whether respondents agree with the statement that "Everyone who pays into Social Security should receive it, no matter what other income they have." According to AARP's results, 83% of Americans agree and "belief in this idea is high regardless of income, age, or gender."
America has dipped its toe into de facto means testing by making Social Security benefits partially taxable, beginning with the 1983 Social Security Amendments that "include up to one-half of Social Security benefits as taxable income for taxpayers whose adjusted gross income, combined with half their benefits and any tax-exempt interest they may have, exceeds $25,000 for a single taxpayer and $32,000 for married taxpayers filing jointly." These threshold levels for the taxation of 50% of benefits have not been increased in the 27 years since this tax came into being, even though median household income has increased across the entire range of wage earners since that time.
In 1993, the Democratic Congress and Bill Clinton passed the Omnibus Budget Reconciliation Act -- without the vote of a single Republican in either the House or the Senate -- which, among other things, raised the taxable portion of Social Security benefits to 85% for those who meet a slightly higher income threshold: $34,000 for an individual or $44,000 for a married couple filing jointly.
But taxing benefits is, and certainly sells politically as, very different from reducing or eliminating benefits based on income.
Historically, conservatives have opposed means testing because it turns Social Security into a redistributive welfare scheme (in addition to the Ponzi scheme that it already is.) The left has generally opposed means testing for the flip side of the same coin: While it has no qualms about income redistribution, it knows that doing so within Social Security is, as the AARP poll results indicate, deeply unpopular.
Unfortunately, the current federal budget disaster could give cover to both sides to turn Social Security into what it was never intended to be and what Americans don't want it to be, especially if means testing can be done under cover of a more pleasant-sounding name. And that's exactly what's coming.
Some Republicans will see means testing as a politically less bad choice than a very large increase in the retirement age (although some increase will certainly be part of a long-term solution for Social Security's fiscal imbalances). It will also generate less media blowback than trying to squeeze another $100 billion out of domestic discretionary spending, whether defense, education, or even the relatively unpopular Departments of Commerce, Labor, and Energy.
In other words, if there weren't an historically large budget deficit and national debt to deal with, Republicans would never go along with turning Social Security into welfare, but this time some of them will for fear of being demagogued about other spending cuts.
And once Republicans begin to go along, asking Democrats if they want to use Social Security to further their self-perception as Robin Hood will be as easy as offering candy to a 5-year old. It's a no-brainer for both to accept, with short-term benefits for the recipients and long-term bills for the adults to pay.
These changes will be made under the name of the "Pozen Plan," named for Robert Pozen, a former Fidelity Investments executive and Democrat member of President Bush's Social Security Commission -- or at least something very like it. Pozen, almost a decade ago, proposed "progressive indexation" of Social Security benefits: Increase benefits for lower income Social Security recipients based on a national gauge of wages, but for higher income recipients the benefits would be indexed to prices, which rise more slowly.
Even Pozen recognized that this would be a hard sell to conservatives, however, so he included a "sweetener" to the proposal to allow a small portion of a worker's payroll tax to go into a personal retirement account instead of into the fiscal black hole of Social Security. Pozen proposed 2%, though George W. Bush in his depressingly brief flirtation with free market principles suggested 4%.
Pozen's plan is an alluringly subtle way to means test, allowing Democrats and anything-but-cutting-more-defense-or-education Republicans to make bogus economic arguments, just complicated enough to confuse most voters, in support of finally achieving the Progressive goal of having the "rich" fund everyone else's golden years.
We'll probably hear some hooey from Obama's economic team along the lines of "wealthier people's income will already increase more with wages than with prices, so it's only fair that we reduce their government benefits." There's nothing like the voice of "experts" to sell Progressivism, continuing a century-long trend of stealing from Peter to pay Paul, and counting on Paul's vote next November.
WHILE THE ARGUMENTS will be clever, intentionally opaque to the average voter, and stand a good chance of winning the day during a frenzy of budget cutting, a move toward means testing of Social Security offers real political risk and deserves pushback from principled conservatives against Republicans and Democrats alike.
Americans of all stripes pay in to Social Security. Anyone with employment or self-employment income pays 12.4% of his or her income into Social Security -- except for this year when there's a temporary 2% break in another example of the Obama Administration's utter misunderstanding of the forces of job creation. (For the employed rather than the self-employed, half is paid by the employer but that is money that would be otherwise be available for compensation for the employee and thus should be viewed by employees as a tax they are paying themselves.)
Many or most Americans ascribe to some version of the "American Dream," meaning -- especially for those below the national median income -- that they hope to become richer in the future than they are today. Furthermore, Social Security tax is usually the largest tax paid by low-wage earners. So "progressive indexing" will sound to millions of Americans like "if my hard work now results in success later, you're going to punish me by giving my retirement savings to someone who didn't work as hard or wasn't as successful."
Additionally -- and typically for Progressive economic policy -- means testing of Social Security creates incentive for people not to save and invest, not to take responsibility for their own retirements. After all, if you build a retirement nest egg that will generate enough income to put you into the category of people who will get their Social Security benefits penalized for your success -- and that's not a very high bar to reach with current thresholds -- each dollar of future earnings will be offset by some number of cents of reduced benefit. Therefore, your incentive to create that nest egg is diminished in the same way that high income and capital gains tax rates discourage entrepreneurship and investment.
The left-leaning Center on Budget and Policy Priorities is already showing us another arrow in the quiver of Progressive rhetoric in support of means testing (even while not fully embracing the Pozen plan): "Progressive Price Indexing Would Transform Social Security to a Modest Retirement Benefit Largely Unrelated to Income." In other words, wouldn't it be nice if we were just all treated the same, all getting the same monthly check from Big Brother to keep us poor and stupid? They hope that their Progressive pixie dust will cause Americans to forget that each of us paid into the fictional "trust fund" in different amounts and that -- it's worth repeating -- Americans see Social Security as more like a forced savings/retirement plan than as welfare. To the extent that Social Security becomes more like welfare, it will lose political support outside the bottom 20% of earners -- and with anybody who expects to work their way out of the bottom 20%.
But for the liberals, it's damn the torpedoes, full speed ahead: CBPP goes on to attack private accounts in a "progressive indexation" environment, suggesting that the combination "would make Social Security less attractive to high earners" and "unlikely [to] be politically sustainable." In other words, if government is going to turn Social Security into welfare, make sure it stays clear of any interaction with the free market, which might show Americans just how bad a deal Social Security really is.