No Social Security Means Test, Eh? Guess What?

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A
stock claim of Social Security's partisans is that Social Security
is not welfare. Rather, it's special because its benefits are paid
as a matter of earned right, regardless of the beneficiary's income
or assets, without any means test.

This
claim has been voiced ever since the Social Security bill was introduced
in Congress in January 1935. Testifying before the House Ways and
Means Committee, the Executive Director of the Roosevelt Administration's
Committee on Economic Security, economist Edwin Witte, declared,
"These annuities will be contractual in nature and free from
any means test." Similarly, shortly after Social Security became
law, Secretary of Labor Frances Perkins wrote in the New York
Times Magazine that benefits "will not be granted as a
matter of charity" but will be "earned annuities to which
the recipients are entitled as a matter of right." Social Security
Board member Arthur Altmeyer told a radio audience that "these
payments will be made as a matter of right and not on the basis
of showing a need. . . . qualified individuals will receive these
benefits regardless of the amount of property or income they possess
. . . " The mainstream media obligingly echoed this line; in
1939 Newsweek informed its readers that "the old-age
pension law is not charity . . . it has no strings attached."

Back
in the Thirties, when most people still believed in the traditional
American and Victorian ethos of hard work and self-reliance, going
on welfare, or "relief" or "the dole," as it
was called then, had a serious stigma. What's more, people going
on relief had to demonstrate that they needed it. They had to show
that they lacked sufficient means (income and assets) of their own,
hence the term "means test" — something which many found
deeply humiliating. Reassuring Americans that Social Security was
"insurance" paid for with "premiums" and received
as an "earned right," not handouts or charity administered
with a means test, was intended to make Social Security popular,
and it worked like a charm.

The
reality was quite different.

The
original Social Security Act attached a very big string indeed:
in order to qualify for benefits, one had to be retired — and by
George they meant it!

If
one received any income from employment covered by the Social Security
Act, one would lose his entire benefit for each month in which this
occurred. This very stringent provision, known as the "retirement
earnings test," is, of course, the same thing as a means test.

At
first, Social Security covered only employees. The self-employed
neither paid taxes nor got benefits. This enabled thousands of Americans
to get around the retirement earnings test. They retired from their
jobs, then set up small businesses. They were able to work and collect
benefits both.

That
changed in 1950, when the self-employed were brought under Social
Security. Now the self-employed paid taxes and would get benefits
when they retired. Trouble was, the retirement test now applied
to them, too. By this time the test had been liberalized enough
that a beneficiary could earn up to $75 a month in covered employment
before losing his benefits. Suddenly the self-employed elderly found
their Social Security benefits suspended if they earned more than
$75 in a given month — proof that the retirement earnings test functioned
just like a means test. Beneficiaries who got burned by the change
sent angry letters to their Congressmen about being skinned out
of the "insurance" they had supposedly bought and paid
for, and about Congress treacherously changing the rules on them
in the middle of the game.

Now,
one may argue — and Social Security partisans such as Dwight Eisenhower's
Undersecretary of Labor Arthur Larson and Social Security Commissioner
Robert Ball did argue — that the retirement earnings test is not
unreasonable since Social Security is, after all, a retirement program,
and paying retirement benefits to someone who isn't retired doesn't
make sense, and that the test does help keep the program's costs
down. But there's no getting around the fact that it's blatantly
at variance with the no-means-test and "earned right"
line fed the public since 1935. And it didn't go down well with
the old folks who found themselves on the wrong side of it.

Indeed,
the retirement earnings test was the most unpopular provision of
Social Security. The elderly grumbled about it for decades. Congress
responded by steadily whittling away the retirement earnings test.
By 1978 the test merely reduced benefits by $1 for every $2 of earnings
above $4,000 for beneficiaries aged 65 and over, and did not apply
at all for those aged 75 and over. Seemingly, the reality of Social
Security was gradually converging on its decades-old advertising
that benefits were administered without any means test.

In
1983, however, matters took a different turn.

For
decades, the Internal Revenue Service consistently held that Social
Security benefits were gratuities — gifts — and, as such, not subject
to tax.

In
the 1983 legislation rescuing Social Security from financial crisis,
Congress made benefits subject to taxation for the first time. Beginning
in 1984, up to 50 percent of Social Security benefits would be subject
to tax for persons whose "combined incomes' (sum of adjusted
gross income plus taxable interest plus one-half of Social Security
benefits) exceeded $25,000 for single beneficiaries and $32,000
for married beneficiaries.

Financial
journalist Phillip Longman pointed out that while this only affected
the wealthiest ten percent of beneficiaries in 1983, things would
change in the future because the tax-triggering income levels, $25,000
and $32,000, are not adjusted for inflation. As inflation artificially
pumps up their incomes, more and more beneficiaries will be driven
over these thresholds. Longman maintained that of all the provisions
of the 1983 legislation, benefit taxation "most reduces the
benefits promised to baby boomers and their children." Even
with the modest inflation rates which the Social Security actuaries'
intermediate analysis assumed, he observed, a $25,000 income in
2030 would have less purchasing power than an income of $4,000 in
the mid-1980s. "So by the time the baby boomers qualify for
Social Security pensions, the program will be effectively means
tested, if it survives at all. Under current law [that is, Social
Security law including the 1983 amendments], only the poorest baby
boomers are even promised a fair return on their contributions to
the system."

Means
testing and benefit taxation do the same thing: they deny benefits
to people with higher incomes (adequate means). In effect, Congress
had kicked means testing out the front door by repeatedly liberalizing
the retirement earnings test — only to sneak it back in through
the kitchen window with benefit taxation. Somehow, it's hard to
believe that they didn't know what they were doing.

Ten
years later, the benefit tax screw got turned again. In 1993 Congress
increased the share of benefits subject to taxation, from 50 percent
to 85 percent for single beneficiaries who had "combined incomes"
above $34,000, and for married couples filing joint returns with
"combined incomes" exceeding $44,000. Below these levels,
the share subject to tax remained at 50 percent. This, of course,
makes benefit taxation more progressive, therefore ever more like
a means test. The higher your income, the more benefit you lose.

In
a 1995 article in the American Association of Retired Persons' Modern
Maturity, Congressman Bill Archer (R-TX) trumpeted that Social
Security is "an u2018earned right' program, and it's Congress'
job to do whatever is necessary to deliver it — today, tomorrow,
and in the 21st century." He opposed means testing
and benefit taxation, because "it violates the earned-right
concept." But since a means test was present in the original
Social Security Act, then Social Security has violated its vaunted
"earned-right concept" from the very beginning — which
means the "earned right" was, and is, a tawdry fiction.

In
2000, amid loud self-congratulation, Congress repealed the retirement
earnings test for beneficiaries at or above the retirement age (currently
65, but slowly ramping up to 67 by 2027), but kept it in force for
beneficiaries below the retirement age. Supposedly an old, old and
long-resented inequity in Social Security was being packed off at
last.

Ah,
but the de facto means test of benefit taxation remains,
and its take is steadily rising. In calendar 1984, the first year
it operated, it took back $3 billion in benefits; in 2001, $12.7
billion. Under the intermediate assumptions of the Social Security
Board of Trustees Annual Report for 2002, its take will hit
$28.7 billion in 2011. The report added that "Because the income
thresholds used for benefit taxation are, by law, constant in the
future, their values in relation to future income and benefit levels
will decline. Thus, ratios of income from taxation of benefits to
the amount of benefits are projected to rise." Translation:

Longman
was right. Benefit taxation will claw back an ever-rising share
of benefit income over time. A progressive means test is already
on the books.

In
disguise, of course, Congress being what it is.

Some
serious Social Security scholars, such as Longman, Pete Peterson,
and myself, endorse explicit means testing and benefit taxation
as an honest, bite-the-bullet way to avert the program's coming
financial crisis. But partisans of Social Security as we know it
won't hear of it. Why, they bluster, it will turn Social Security
from insurance into welfare! It will violate the earned-right concept!
What they either don't know or won't admit is that Social Security
is already means tested — and, what's more, it always has been.
Draw your own conclusions about your "insurance" and your
so-called "earned right."

March
26, 2003

John
Attarian (send him mail)
is a writer in Ann Arbor, Michigan, with a Ph.D. in economics. His
book Social
Security: False Consciousness and Crisis
, which treats the
myths and realities of Social Security in detail, has just been
published by Transaction Publishers.


     

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