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.
