NewtGingrich4.jpg

Is Means-Testing Just?

Every once in a while, the policy wonks and would-be social engineers in the conservative camp dream up a truly awful idea, which they then present to the world as a wonder. Back in the 1990s, the Heritage Foundation dreamed up the individual mandate, which they celebrated as an ingenious, market-oriented alternative to the single-payer plan at the heart of Hillarycare.

Newt Gingrich, who can rarely resist novelties, fell prey to this one. Mitt Romney, the managerial progressive’s managerial progressive, beat back the advocates of a single-payer plan in Masschusetts, implemented the individual mandate in its place, and touted his handiwork initially as a model for the other states and later as “a model for the nation.” Barack Obama and the Democratic Congress took Romney at his word and hired his erstwhile advisors. Then, by means of the Florida Flim-Flam (sometimes known as Gatorade), the Louisiana Purchase, the Connecticut Compromise, and the Cornhusker Kickback, they foisted an even more cockamamie version of the individual mandate on those not already subjected to it by Romney and his associates.

mitt_romney.jpgAlong the way, next to no one on the left or right paused to consider whether policing the lives of ordinary citizens in this fashion is not a species of tyranny. Almost everyone thought that the end – getting all Americans on health insurance – justifies the means, for the unspoken presumption of our masters in Washington and in the state capitols is that ordinary people lack the capacity to assess the risks they encounter, make their own decisions, and pay the consequences. They want us to throw ourselves into their arms and say, “You do the thinking for all of us!”

I mention the recent and the not-so-recent past because the policy wonks and would-be social engineers in our camp are up to their old tricks. As I noted in a post this past summer, Stuart M. Butler, Alison Acosta Fraser, and William W. Beach have developed a proposal for the Heritage Foundation entitled Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity. On that occasion, I added:

There is one particular in which the estimable Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression, does not like it – and, frankly, I’m with her. The folks at Heritage want to means-test Social Security. They want to reduce payments to anyone who makes over $55,000 a year and eliminate them altogether – both for individuals who make over $110,000 a year and for couples who make more than $165,000 a year – and Tim Pawlenty has reportedly endorsed something similar.

Think of what this means. If we were to adopt this proposal, the federal government would tax one group and tax it heavily, as it has been doing for more than seventy years. Then, it would provide that group in return for its contributions with . . . nothing or next to nothing at all. This tax would be a form of punishment – designed for those who had had the effrontery to succeed. And, of course, like every other form of transfer payment, it would reward failure. It would be hard to think of any policy more likely to subvert the work ethic than this.

“It would also,” I continued, “turn our polity into a regime of broken promises” – for, as Shlaes put it,

Social Security is different from other entitlements. In their first great explanatory pamphlet of 1937, the members of the Social Security Board carefully presented the program as insurance, and they wrote in actuarial terminology: “payments are like premiums paid for fire insurance or accident insurance,” or “saving for a rainy day.”

Americans would pay a portion of their wages into Social Security’s trust fund as they worked, helping to provide a safety net for the elderly, and in exchange the government promised to pay them reliable benefits when they retired.

That contract-and-account culture was preserved and promoted down the decades. Most Americans have, over time, considered Social Security a fairly good deal, a contract that was honored. The contractual aspect is important to retirees, especially those who may earn enough to be deemed “affluent” while still counting on Social Security’s monthly payments. As Dean Baker and Mark Weisbrot pointed out more than a decade ago in “Social Security: The Phony Crisis,” cutting seniors off from Social Security makes no more sense than telling them they are no longer entitled to interest payments on their Treasuries.

As Shlaes pointed out, it would be easy to fix Social Security. All that is required is to index “its base pension formula over time to inflation” (as opposed to wages) and to raise the age of eligibility. Both proposals make sense. Indexing the formula to inflation preserves the pension’s value (while indexing it to wages inflates its value), and raising the age of eligibility would restore the program to its original purpose. Social Security was meant to be a form of insurance. In the 1930s, when it was instituted, only a small proportion of Americans lived past 65. The program was aimed at those who outlived their working years. Now most Americans live well past 65, and to an ever increasing degree they work past that age. To expect them to do so is hardly unjust.

Shlaes argued that Medicare and Medicaid are programs of a different character – aimed at providing transfer payments. Reconfiguring these programs might actually serve the public good, she suggested, and it has to be done – for there is no other way to contain the costs.

Paul-Ryan.jpgI return to this question now because there is every prospect that, if the Republicans win and win big in 2012, they will means-test all of the so-called entitlements programs – Social Security, Medicare, Unemployment Compensation, and the like. John Boehner, Paul Ryan, Tom Coburn, Rick Perry, and Mitt Romney have all signed on. So has Governor Mitch Daniels, alas. Only Newt Gingrich seems to be opposed. At least on the right, means-testing would appear to be yet another terrible idea whose time has arrived.

I am no friend to any of the entitlement programs. All of them involve a stealthy transfer of wealth. All of them discourage diligence and industry. All of them reward sloth and punish success – and it seems to me that means-testing those not yet means-tested would serve only to take bad policy and make it worse, for it would transform what presents itself as a species of social insurance (and to some degree really serves as such) into an out-and-out welfare program.

JohnBoehner.jpgIn effect, as Paul Krugman on the left and Tyler Cowen on the right have noted, the proposals entertained by the gentlemen mentioned above are marginal tax increases – the very thing that these same gentlemen are inclined to decry (with the notable exception of Mitt Romney, who, like Obama, openly espouses increasing the taxes of high earners and successful investors). In my judgment, the last thing we should do is to raise taxes on the investing class, and we do not need to shore up these programs. We need gradually to whittle them down – and to do so without ours becoming a regime of broken promises that denies benefits to those who have paid in for years.

As things stand, we live in a world in which something close to half of Americans pay no income tax at all. The top ten percent of earners bear the bulk of the burden. Means-testing – which already exists for Food Stamps, Medicaid, and the like – would serve only to reinforce a set of arrangements that is not only an outrage but counter-productive to boot.

Why should anyone in today’s America work really hard, scrimp, and save?

RickPerry3.jpgAfter all, in the end, you will only be punished for your efforts. You will pay punitive taxes at the federal level and in many states. When your children apply for college, you will have to pay tuition at a radically inflated rate. The great majority of the applicants will be offered what are called “scholarships.” But these are rarely what they seem. What the majority of students are offered is, in fact, discounted tuition. The only people who actually pay full freight are those foolish enough to have played by the rules and to have made a real go of it. The tuition listed on the school’s website is a nominal rate artificially inflated so that high-earners can be forced to pay for the education of other people’s children. It is as if you went to a restaurant and there was one set of prices for the well-to-do and another for everyone else.

TomCoburn.jpgIf the Republicans win and win big in 2012, they are likely to take the same malicious principle and extend it to Social Security and Medicare. They ought to know better. But even the best of them – and I say this about men whom I admire – do not. Someone should pull John Boehner, Paul Ryan, Tom Coburn, Rick Perry, Mitt Romney, and the Governor of Indiana aside and whisper in their ears, “When the Tea-Party sprang up in 2009, its initial adherents carried signs reading, ‘Honk if you are paying someone else’s mortgage?’ You would do well to take notice!”

There is anger out there, justified anger, but the policy wonks and would-be social engineers in the conservative camp blindly soldier on. The clever folks at the Heritage Foundation are up to their old tricks, and the Republican notables are falling in line, just as they did when the individual mandate was first proposed.

I would like to hope that this blogpost might serve as a wake-up call. Otherwise, I fear that the Republican Party will once again march over a cliff.

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More by Paul A. Rahe

  1. Al Kennedy

    Yes, means-testing is “just” based on how Social Security is defined and currently operates.  I think this obfuscates the real question: what is our obligation to those in our society less fortunate than ourselves, and what form should our assistance take for those elderly, infirm and without assets.

    The word “just”, like “fair”, does not lend itself to an objective, measurable definition. As conservatives, regardless of how much we dislike the notion of Social Security or wish it had never been legislated, it is a fact and it is insolvent. 

    We need to propose a plan in order to make it solvent and to reestablish the fact that every individual should be responsible for the expenses of their old age.

    We need to have a bridge between today and how it should be.  It has to be politically achievable.  Today, with President Obama railing against the “rich”, Social Security is not the place to make a stand. 

    I’m not sure how we do this, but we need to incent private charities to address this and change the political discussion from “what is just or fair?” to “what should and can we realistically afford to do with government?”.

  2. genferei

    The King Prawn, JustinC, Scott Reusser, Instugator – thank you.

    Professor – I couldn’t disagree more.

    • Social Security is not, and never has been, a savings or insurance scheme, no matter what propaganda might have been spread.

    • Even if it was, it is an individual mandate, and therefor “a species of tyranny” the product of “the unspoken presumption of our masters in Washington and in the state capitols … that ordinary people lack the capacity to assess the risks they encounter, make their own decisions, and pay the consequences.”
    • I fail to see that ripping the mask (such as it is) off the Social Security system to reveal its true nature as welfare – “a stealthy transfer of wealth …discourag[ing] diligence and industry … reward[ing] sloth and punish[ing] success” – and at the same time reducing its scope, would be a bad thing to do.

    Can the American people handle reality, or can’t they? Can they make decisions for themselves, or can’t they?

    If they can, then let’s talk about what sort of safety net should be provided to impecunious seniors, and stop bribing the middle class with their children’s money.

    If they can’t…

  3. Israel P.
    Nick Stuart:  We do contract work if we can get it, minimum wage at Stuff-Mart if we can’t.

    Thoughts anyone? · Dec 12 at 7:43pm

    My first thought is to thank Dr. Rahe for clearing my conscience.  I have been thinking this way all along and have been wondering why means testing has been such a no-brain idea. I wondered if the alternative was a no-hearter.  So thank you for that.

    Now to Nick’s question, the answer is kind of unavoidable.  You’d have to make the 65+ set eligible for unemployment insurance. (Remember, this is also called “insurance” and after all these years of paying in, how can you say “no” now.) Of course, making the 65+ stand in line at the employment office might be an even greater no-hearter than rejecting means testing.

    In general – as I have written here before – raising the age to receive benefits does not require raising the age to stop paying into the system.  No reason you couldn’t have a few years – say 65-67, gradually rising to 70 - when you neither pay in nor receive a pension.

  4. genferei
    Paul A. Rahe [A]s Shlaes put it,

    Social Security is different from other entitlements. In their first great explanatory pamphlet of 1937, the members of the Social Security Board carefully presented the program as insurance, and they wrote in actuarial terminology: “payments are like premiums paid for fire insurance or accident insurance,” or “saving for a rainy day.”

    And yet not everyone was fooled (as if being fooled by a con trick is some sort of defense):

    The so-called reserve fund [established by the Social Security Act] for old age insurance is no reserve at all, because the fund will contain nothing but the Government’s promise to pay, while the taxes collected in the guise of premiums will be wasted by the Government in reckless and extravagant political schemes.

    This is from the Repbulican Party Platform of 1936.

  5. LowcountryJoe
    genferei: 

    • Social Security is not, and never has been, a savings or insurance scheme, no matter what propaganda might have been spread.

    • Even if it was,…[removed to make word limit]

    How do you reconcile this?  The program also goes by the name Old-Age, Survivors, and Disability Insurance (OASDI).  And it is commonly understood that the insured ‘event’ is not whether or not the benefit is needed; the event(s) is/are: reaching the eligibility age, or, becoming qualified through a disability that prevents one from earning an income, or, the death of a worker who would have been qualified as long as there is a non-remarried spouse who reached the eligibility age or who had a child(ren) and that (those) child(ren) are still minors (or going to school until their 19 year, second month).

    If one can justify taking away the benefit from those who don’t need it — which was never the intention and would shred the social contract of the program, then one can also justify, a lot easier, I believe, raising the eligibility age to reflect the new reality of what defines old-age.  

  6. Guruforhire

     I agree with Genferei.  One only has to read the variety of supreme court decisions, specificly Flemming v Nestor.  Is means testing unjust?  Is it more unjust than taxing one group to provide free stuff for another group?

    If one takes the entirely incorrect and indefensible popular view about social security, means testing is unjust.  You are actively denying something that is actually theirs.  If one is to treat it as a welfare program, which it undeniably is, than means testing is just a sober realistic paring down of a welfare program.

    Consider SCHIP which was recently raised to support people with incomes of 80K a year.  Would it be unjust to trim that back to say 35K a year?

     My general theory for SS is as follows:  1-Raise the retirement age to match the lifespan expectancy of the 1983 commission.  2- Index payments to previous years revenues.

  7. Paul A. Rahe
    C
    Anthony Kaiser: I’d be OK with the Shlaes proposal, but I wonder what the new age of eligibility should be.  Some proposals raise it to near 70, but should it be even higher?  If we are insuring against old age instead of creating a retirement account, maybe you should have to get to 75 or 80 before you start getting benefits. · Dec 12 at 7:46pm

    The general plan is to raise it slowly — one month a year — up to, I believe, 69.

  8. Guruforhire
    LowcountryJoe

    genferei: 

    • Social Security is not, and never has been, a savings or insurance scheme, no matter what propaganda might have been spread.

    • Even if it was,…[removed to make word limit]

    How do you reconcile this?  The program also goes by the name Old-Age, Survivors, and Disability Insurance (OASDI).  And it is commonly understood that the insured ‘event’ is not whether or not the benefit is needed; the event(s) is/are: reaching the eligibility age, or, becoming qualified through a disability that prevents one from earning an income, or, the death of a worker who would have been qualified as long as there is a non-remarried spouse who reached the eligibility age or who had a child(ren) and that (those) child(ren) are still minors (or going to school until their 19 year, second month).

    Because it is not, never was, and will never be an insurance program.  Puffery =/= truth

  9. Scott R

     Lowcountry Joe: The social contract has long ago been shredded. By us. It was shredded when we all, through our representatives, chose to spend our own ”trust funds” before retirement and improperly fund our own Medicare given what we now expect from it – and then stick our kids with the consequences.

    The injustice done to me, when I’m inevitably penalized for saving for my own retirement, will be nothing as compared to the injustice already done to future generations. I can handle it.

    The question should not be “Is means-testing just?”, but rather “Is means-testing less  un-just than the alternative?” And it is.

  10. genferei
    LowcountryJoe

    genferei: 

    • Social Security is not, and never has been, a savings or insurance scheme, no matter what propaganda might have been spread.

    How do you reconcile this?  The program also goes by the name Old-Age, Survivors, and Disability Insurance (OASDI).  · Dec 13 at 3:25am

    I think we can agree that it is not a savings scheme, at least. The Social Security Administration describes it as “a transfer payment–transferring income from the generation of workers to the generation of retirees”.

    They go on to say it is a “transfer payment”:

    with the promise that when current workers retire, there will be another generation of workers behind them who will be the source of their Social Security retirement payments.

    But this “promise” is of quite a different nature from the contractual promise that forms the basis for insurance. First, it is not really a promise, but a hope. Second, it is political – and without a constitutional amendment, not binding on the future electorate. Third, unlike the case of insurance where A pays premiums to B in order to (perhaps) receive a payment from B, the Social Security system is that A pays B in order to (perhaps) receive a payment from C. Finally, you can tell it’s not a real contract of insurance because people have to (mis)use the term “social contract” to describe it.

  11. Instugator

    Scott points out every current recipient’s culpability – we are responsible for the system as it stands today and the injustice inherent.

    Scott Reusser: Lowcountry Joe: The social contract has long ago been shredded. By us. It was shredded when we all, through their representatives, chose to spend our own”trust funds” before retirement and improperly fund our own Medicare given what we now expect from it –and then stick our kids with the consequences.

    The injustice done to me, when I’m inevitably penalized for saving for my own retirement, will be nothing as compared to the injustice already done to future generations. I can handle it.

    Then Scott mentions,

    Scott Reusser:

    The question should not be “Is means-testing just?”, but rather “Is means-testing less un-just than the alternative?” And it is. · Dec 13 at 4:25am

    I would ask, which alternative? Both mentioned by Dr Rahe above are fundamentally unjust – tweaking the current system and maintaining the Ponzi-like aspects of it (where does that end?) or making it welfare. The program was sold as an investment.

    Justice requires we end it or transform it to something else. I prefer privatization – Singapore’s CPF.

  12. Guruforhire
    genferei

    I think we can agree that it is not a savings scheme, at least. The Social Security Administration describes it as “a transfer payment–transferring income from the generation of workers to the generation of retirees”.

    Edited on Dec 13 at 04:39 am

    To expand on your fine post:  In Flemming v Nestor the supreme court specificly rejects that SS is an earned benefit, or that there is a right by contract to any payment from the government.  The tax is a tax that funds the federal government.  The checks are checks from the federal government to the people the congress decides to send them too.  This is constitutional only because the supreme court after having been threatened with being made irrelevant decided that discretion is the better part of valor and said that the ravages of old age are so prevasive as to be considered general in nature.  Thus did SS as a transfer payment from the young to the old become constitutional.

  13. Scott R
    Instugator:

    Scott Reusser:

    The question should not be “Is means-testing just?”, but rather “Is means-testing less un-just than the alternative?” And it is. · Dec 13 at 4:25am

    I would ask, which alternative? [...]

    Justice requires we end it or transform it to something else. I prefer privatization – Singapore’s CPF.

    Agreed, Instugator, but that’s the world of theory, not the world as it is – one that includes, well, Democrats. Ryan’s plan, I’m afraid, already pushes the limits of what is possible politically.

    Re means-testing, Ryan had a devil of a time making his numbers add up as it is. Take from him the tool of means-testing, and his task would be impossible, both mathematically and politically.

    An academic discussion of “Is means-testing just?” is an exercise that Ryan, tasked with actually crafting a workable bill, is unable to indulge in.

  14. Western Chauvinist

    What a hot steaming mess progressivism produces.  There are so many unjust aspects of this system, it’s hard to know where to start.  

    As for incentives, people would be far more likely to “work really hard, scrimp, and save” if they no longer had the expectation that everyone, not just the destitute, could expect thirty years of ”social insurance” at retirement.  – Scott

    Mr. Chauvinist entered his career more than 30 years ago believing and behaving as if he would never see a dime of his Social Security insurance.  In his 20s he could see the system was unsustainable. Now that we’re close and running the numbers with our financial planners, yeah, we want that money.  We’ve saved and invested and put together a decent nest egg, but what with staring down the barrel of high inflation and long term care expenses, we want that money.

    There’s a demography problem with raising the retirement age.  Black men have the lowest life expectancy of any group (68?).  Followed, I believe by white men, black women and white women.  So, raise the retirement age to 70 and black man X pays into the system and promptly dies before collecting.

  15. Western Chauvinist

    How about this for reform?  Any program which can only be made just by assessing each case individually is not a purview of the federal government.

  16. KarlUB

    As many have noted, Prof. Rahe has himself on the horns of a legal/semantic dilemma. But neither horn, really, argues against means-testing.

    Option A: Social Security is Insurance

    If this is true, then accept insurance policies sometimes don’t pay. Car insurance, for example, delivers peace of mind in the event of catastrophe. It is not designed to deliver a good return on investment.

    Option B: Social Security is a Welfare Program

    If this is true, then we can obviously means-test social security.

    On a related note, option A is at the crux of our health care dilemma. One gets into all sorts of problems when using insurance-based math as funding for things that are chronic vs. acute: Oil changes vs. head-on collisions. Having the means to live in retirement vs. being old and poor. Annual check-ups vs. heart-bypass surgery.

    Funding mechanisms that pretend to be insurance, while covering chronic, predictable situations will, inevitably, become Ponzi schemes.

    Since means-testing will be helpful in digging ourselves out of our fiscal hole, then, we should accept that we have a welfare program on our hands and act accordingly.

  17. Guruforhire
    KarlUB:

    Since means-testing will be helpful in digging ourselves out of our fiscal hole, then, we should accept that we have a welfare program on our hands and act accordingly. · Dec 13 at 5:50am

    I dont think we should accept that something is a welfare program because it is expediant, we should do it because it is true.  The truth of something is not and should not be defined by its convienence.

  18. Scott R
    Western Chauvinist: …. Now that we’re close and running the numbers with our financial planners, yeah, we want that money. 

    …and you’ll get it, WC. Every plan on the table exempts those close to retirement from mandated change, including means-testing. Fear not (and good luck). 

  19. The King Prawn

     The real question, in my humble (yeah, right) opinion is whether or not Social Security is moral. One of the common arguments against changing the system in any substantive way is that so many people have planned their lives around it or need it at the time of retirement. The heart of this argument is that individuals are dependent on government for their daily subsistance. Attempting to repair and continue this program actively advocates for continued citizen dependence on government largess. This is immoral. Government should always be dependent on the citizens for its existence, not the citizens on government. Or, as Ronald Reagan put it, we are a people who have a government, not the other way around.

  20. The King Prawn
    Guruforhire

    KarlUB:

    Since means-testing will be helpful in digging ourselves out of our fiscal hole, then, we should accept that we have a welfare program on our hands and act accordingly. · Dec 13 at 5:50am

    I dont think we should accept that something is a welfare program because it is expediant, we should do it because it is true.  The truth of something is not and should not be defined by its convienence. · Dec 13 at 6:01am

    Edited on Dec 13 at 06:02 am

    It is a welfare program according to the Supreme Court. The money paid in taxes goes into the treasury and is not earmarked in any way for any specific purpose. Government can do anything it wants with that money, and it has.