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.
Along 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.
I 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.
In 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?
After 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.
If 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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Comments:
May '10
Re: Is Means-Testing Just?
Dr. Rahe - Such talk of an "investor class!" Just today Harry Reid assured us that "millionaire job creators are like unicorns. They don't exist!"
May '10
Re: Is Means-Testing Just?
Dr. Rahe, your comments above are by an large so sensible that they are essentially my own. There is one question to which I have not found an answer, and nobody else who advocates "All that is required is to ... raise the age of eligibility" has yet answered either:
Where are those of us who are not government workers or tenured faculty supposed to work on into our '70s?
When somone loses a job after the age of 50 (which is virtually all of us who are not government workers or tenured faculty), that's it. Finding a "full time" (i.e. with "benefits") job or starting a successful business is like drawing an inside straight or shooting the moon in Hearts. It happens, but not very often, and that's not the way to bet. We do contract work if we can get it, minimum wage at Stuff-Mart if we can't.
Thoughts anyone?
Dec '10
Re: Is Means-Testing Just?
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.
May '10
Re: Is Means-Testing Just?
While we're on the subject of "means testing." Wealthy people have already been "means tested" in that the more they make, the more they pay in. Medicare especially since there is no upper limit on the Medicare tax.
Make no mistake, the means-testing will start with the zillionaires, then very quickly the threshold will begin to drop until anybody with a net worth in excess of some nominal amount like $2500 or so will be means-test-juggled out of any return of the money that has been extracted from them for decades.
Dec '11
Re: Is Means-Testing Just?
Means testing is no less Marxist than the progressive income tax. In fact, it's even worse: it deprives people of the "benefits" they were promised for all the decades when "contributions" were being extracted from them at the barrel of a gun.
Mar '11
Re: Is Means-Testing Just?
I was under the impression that there is already a great deal of wealth transfer from the rich to the poor under Social Security. Why not make it overt though means-testing and bring on the long-needed debate about the purpose of government-mandated insurance?
Jan '11
Re: Is Means-Testing Just?
Hell no! This is simply not fair: telling a group of people who were prudent with their other savings and investments that they will be short-changed for making wise decisions and not 'needing' their benefit. The only fair thing to do is to raise the eligibility age at which full benefits can be collected and keep the current eligibility age but cause it to be at a significantly reduced benefit.
Personally, I want an opt-out option -- one where the people opting out feel some pain but help with the unfunded liabilities going forward.
Jun '10
Re: Is Means-Testing Just?
If homosexuality--defined by behavior--ever becomes a clearly delineated protected class in the Constitution, then maybe "high income earners" can follow suit. That's also a behavior. Steve Wozniak, for example, couldn't avoid inventing technologies that people wanted to pay him lots of money for. Some poor souls are just born to invent new things, and apply for valuable patents. It's just their nature, no fault of their own. And if "the rich" don't feel like victims yet, they probably will soon. It's certainly in the air.
Mar '11
Re: Is Means-Testing Just?
Nick Stuart:
Where are those of us who are not government workers or tenured faculty supposed to work on into our '70s?
When somone loses a job after the age of 50 (which is virtually all of us who are not government workers or tenured faculty), that's it. Finding a "full time" (i.e. with "benefits") job or starting a successful business is like drawing an inside straight or shooting the moon in Hearts. It happens, but not very often, and that's not the way to bet. We do contract work if we can get it, minimum wage at Stuff-Mart if we can't.
This is the crux of the problem.
As long as the number of years we live increases, but our number of productive years stays the same, any pension scheme is doomed. No amount of jiggering with the system can alter that basic fact.
Raising the age of eligibility or means-testing Social Security are simply ways of putting off a discussion to which there are no satisfactory answers.
Dec '10
Re: Is Means-Testing Just?
Professor, it had to happen eventually, and it has: I disagree with you. By all means, means test Social Security and show it for the welfare, wealth transfer system it is. It may have been sold as an insurance program, but it never has been. Government mandated retirement savings is just as much of a mandate as a health insurance mandate. In fact the only reason SSI was deemed constitutional by the SCOTUS is because the money does not belong to those who pay into the system. The OASDI tax is just a tax like any other. "The proceeds of both taxes [individual and employer] are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way." (Helvering v. Davis) Once our money is in the hands of the government it belongs to the collective and not to the individual. It is at the whim and will of the government. No matter how much a person pays into the system the government owes him nothing in return. The government can promise all it wants to return that money in the form of services or payments but is not bound by its promises.
Mar '11
Re: Is Means-Testing Just?
Raising the age of Social Security eligibility, however actuarially desirable it may be, is not without serious social consequences. Most people on both sides of the senior divide are not self-employed. As a result, their continued employment depend not only the seniors’ sustained willingness and ability to work, but also on the presence of an employer willing to pay some mutually acceptable sum. This cannot simply be assumed.
There are many forms of discrimination in the workplace. None is more pervasive than age discrimination. It is so unconcealed that it frequently takes the form of open and codified mandatory retirement ages. If the way to prolong the day of reckoning for entitlement programs is to delay eligibility, so be it. But let’s not delude ourselves into thinking we’ve solved the problem when we’ve merely traded one problem for another.
Feb '11
Re: Is Means-Testing Just?
This is a timely discussion. Is it a tax? Or a set aside? To hear some speak even this week it's a tax, as in Payroll Tax. So it's a tax when it fits our agenda, and a set aside when we don't want it to be a tax?
Means testing is fine by me. Have you ever noticed how SSI is spoken of by a recipient of SSI? "Ohhh it's a pittance!" but "Don't you dare take away my pittance!"
So what if FDR called it an investment. In one context we as conservatives all call the SS Trust Fund and FDR a lie, then we turn around and say dont touch my slice of lie! The reality is that we all want to be be funded well enough to not NEED the pittance. So why not walk the walk? Why not call it what it is, welfare for those not properly funded for retirement instead of walking both sides of the fence on this. Means test it. I can assure you that the Drs. JDs. PhDs, IBs and such will not be intentionally waiving earnings for the pittance.
May '10
Re: Is Means-Testing Just?
There is a choice only between bad options, and means testing is the least bad.
The common figure is that boomer Medicare recipients will get back 2 1/2 times (or likely more) in benefits over what they paid in. This is unsustainable and an immoral burden placed on our kids. If reducing this immoral burden requires cutting the benefits of middle, upper-middle, and upper class boomers, while preserving (more or less) the benefits of the less well-off, then so be it.
Means testing creates a double standard, yes. It creates a moral hazard, yes. But maintaining a system in which lavish old-age benefits are the expectation even of those entirely without need is nuts. Welfare should be a safety net for the poor. Period. That requires means testing. Sorry.
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.
Jan '11
Re: Is Means-Testing Just?
Nick Stuart:
When somone loses a job after the age of 50 (which is virtually all of us who are not government workers or tenured faculty), that's it. Finding a "full time" (i.e. with "benefits") job or starting a successful business is like drawing an inside straight or shooting the moon in Hearts. It happens, but not very often, and that's not the way to bet. We do contract work if we can get it, minimum wage at Stuff-Mart if we can't.
Thoughts anyone?
Yeah, my thought is that the retirement age has to be raised or the system goes belly-up and no one gets nothin'. Those who cannot or won't work into their mid 70s -- and who insist on retiring sooner -- must fund the time gap by themselves with private investments.
Dec '10
Re: Is Means-Testing Just?
What politicians fail to realize is that whatever rules they establish will be largely overcome by taxpayers. Perhaps people making 10 mil will go along but those making 200k will do everything in their power to get below 100k. They will withdraw all retirement plan money the year before they retire. They will squirrel money away in annuities, corporations, kids accounts etc.
Taxpayers will go to great effort to beat the tax man and most likely producing less revenue for the government. What an exciting time to be a tax advisor!!!!!!!!
Jan '11
Re: Is Means-Testing Just?
I could not disagree with this statement more. And don't think for a minute that if a means test were developed, the wealthy wouldn't find a way to hide assets or gift their money away to their heirs to avoid the penalty and get their benefits just like anyone else who contributed would. Means testing is immoral. To even suggest that it is a viable option to help the shortfall plays right into the hands of the class warfare idiots from the so-called progressive prospective.
Aug '10
Re: Is Means-Testing Just?
It is a Ponzi Scheme with two requirements to receive a payout - age and payment into the system. When it was created, the retirement age was so high, few would qualify and more individuals paid to support those at the top - in essence the thing that perpetuated the ponzi like aspects was that the pay out was more like winning the lottery.
However, all Ponzi schemes collapse and when they do, the Feds don't look at the victims to keep paying in to support those who had the good fortune to enter the scheme early. Yet, Dr. Rahe, that is what you are asking us to do now.
The changes proposed are so fundamental that they alter the very nature of Social Security - effectively ending the program. "Solutions" that raise the age do nothing to address the problem posed by Nick. "Solutions" that means-test it turn it into another welfare program (once it becomes welfare, how long until those who did not pay in receive benefits?)
I propose we treat it like a newly discovered Ponzi Scheme - tell the investors the nature of the fraud, cease collecting the contributions, and return to those investors what can be recovered.
Oct '10
Re: Is Means-Testing Just?
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?”.
Oct '10
Re: Is Means-Testing Just?
The King Prawn, JustinC, Scott Reusser, Instugator - thank you.
Professor - I couldn't disagree more.
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...
Edited on December 13, 2011 at 11:00amFeb '11
Re: Is Means-Testing Just?
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.