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Home Publications Blogs Beat the Press Fun With Numbers: Means Testing Social Security

Fun With Numbers: Means Testing Social Security

Friday, 07 June 2013 15:56

Todd Ganos at Forbes Magazine is upset that people earning $150,000 a year get Social Security. Hey, I'm upset that people earning $1 million a year get interest on government bonds. In both cases they don't need it, but you know what? They paid for it.

But let's skip the morality play and have some fun with numbers. We want to figure out how much money we could in principle save by taking away Social Security benefits from these rich retirees. Ganos tells readers:

"According to the Congressional Budget Office, there are approximately 25.6 million senior households in the United States.  The average annual pre-tax income of the top 10% of senior households is approximately $197,000.  Does such a household need Social Security retirement income payments?"

Okay, so the average income for this top 10 percent of seniors is $197,000 a year. Let's suppose that the average income for the top 1 percent of seniors is $1 million a year, which is probably pretty much in the ballpark. That leaves the average income for the remaining 9 percent of these wealthy seniors at just under $110,000. And that is still an average. Many will have considerably lower incomes. Yet, Ganos thinks we can painlessly take away Social Security benefits for this group that average (for them) close to $20,000 a year. He must not have heard all the howls of pain last fall about the job creators being devastated by an increase in their tax rate of 4 percentage points on income over $450,000 a year. 

If we want to be serious about this exercise, we would look at the actual distribution of benefits rather than playing games with averages that include the Warren Buffets of the world. We did this a few years back. If you wanted to cover 10 percent of the benefits paid out (not 10 percent of seniors), you had to get to individuals with incomes of less than $50,000, not counting their Social Security benefits. (We took person income to keep things simpler, many seniors do live alone.)

Now we could tell all these people that we are just expropriating their Social Security checks, as Ganos advocates, but there are two problems. First, most of the people affected do not meet our usual definitions of rich or even particularly well off. The other is that we have just created a huge effective marginal tax rate somewhere near $48,000.

If we assume that the average Social Security benefit is $15,000 a year, then anyone who earns one dollar less than the Ganos cutoff will stand to lose $15,000 in income, plus their marginal tax rate, on their next dollar of income. Usually we don't like to create cliffs like this for the obvious reason, people find ways to avoid them.

A more serious discussion would have a phase out. The question then is how rapid we phase out the benefit and where we want it to actually hit zero. If we want to follow the Ganos line and deny benefits to the richest 10 percent of beneficiaries, then we would want the phase out to be complete somewhere at incomes around $50,000 per person. If we want to eliminate $15k in benefits and we use a 30 percent phase out (each dollar of income costs you 30 cents in benefits), then we would have to start cutting benefits at any positive income level. In other words, at $10,000 you would lose $3,000 in benefits, at $20,000 you would lose $6,000 in benefits, etc.

Even in this case, we have effectively added 30 percentage points to the marginal tax rate -- that's a pretty serious disincentive. For those who are still working this would likely push their marginal tax rate over 60 percent. This measure would be a powerful incentive to hide income for example by buying a condo with savings and using that as a vacation home rather than investing money and paying for hotels. (The accounting industry has tons of tricks like this.) 

Of course you could start the phase out a higher income level (like $50,000 per person) and have it at a more reasonable rate (e.g. 10-20 percent), but then you find that you don't save the program much money. In our paper we found that the savings, net of tax, for a 20 percent phase out starting at person incomes of $40,000 would save around 3 percent of benefits. If it was started at a person income of $100k it would save around 0.6 percent of benefits. These numbers give a much more realistic idea of how much can be saved with means-testing. See how much fun math can be?


Comments (10)Add Comment
written by socialism, June 07, 2013 5:44
"For those who are still working this would likely push their marginal tax rate over 60 percent."

Just the first step in the propaganda play
written by Joe T., June 07, 2013 6:10
1. We pay in like any annuity, we get back (actuarially) what we paid in. SS = Fair deal, conservative deal.
--> 2. Upset the above equation. SS = Lousy deal, liberal deal.
3. "It's welfare!"
written by Chris Engel, June 08, 2013 3:27
The solution is so simple and sellable: raise the cap.

The only people who would complain are those who are wealthy enough that they aren't particularly constrained in their liquidity. No reason why any teahadist should care if some guy making 200K+ has to fork over payroll tax.

Then again, teabaggers are totally controlled by the plutocrats that they all aspire to one day become. So the working class 'baggers will probably still fight against rich ppl paying more.
When Feeding at the Welfare Trough, Make Sure the Spotlight Shines Nowhere Else
written by Last Mover, June 08, 2013 5:49
Concern trolls like Todd Ganos come nowhere near their asserted standards when it comes to the rich getting too much welfare.

What Ganos is doing is playing with something that is easy to measure and therefore sell as a pumped up fraudulent way to level the playing field between the concentrated rich and everyone else.

Never mind the elephant in the room that most of the concentrated rich don't earn their keep anyway. From there, skimming off subsidies from things like SS is just icing on the cake, and conceding to forgo it is like tossing a few dollars into a street beggar's cup.

It's no different, for example, than how the rich use air travel in high disproportion to the rest of the population. They and Ganos would tell you they pay for it, but they pay nowhere near the true cost and are heavily subsidized in all sorts of ways.

Recently for example, the government had no problem cracking the whip to prevent the sequester from interfering with smooth check-in and security clearance procedures when boarding airplanes.

When coddling the rich by disqualifying them from paltry sums that flow to ordinary Americans, it's important for clowns like Ganos to use special media spotlights that can't shine on anything but the trivia.
written by bmz, June 08, 2013 9:09
" For those who are still working this would likely push their marginal tax rate over 60 percent." We already do that: I am 71 years of age, and am self-employed part time. My AGI is ~$55,000/yr. At that income, I must pay, in addition to my regular tax, a tax on 85% of my SS benefits(for every marginal dollar of income, I pay a tax on $1.85). You know that Social Security contributions are taxable; hence, Social Security benefits should not be taxed. However, Congress, in its wisdom, or corruption, has declared that anyone with an AGI of $32,000 (which includes one half of Social Security benefits) is wealthy enough to pay double taxation on 85% of those benefits. My total marginal income tax rate is: 25% X 1.85 = 46.3% +12.4%(self-employment tax) +7.5%(state income tax) = 66.2% total marginal income tax rate.
60% is the new normal for us old guys
written by John Parks, June 08, 2013 5:25
Thanks BMZ. You painted a bleak picture of the future. I always suspected that I was an indentured servant to the state and you've reinforced my suspicions. After you receive your 33.8% net, you will then get to pay various property taxes including miscellaneous city, county, and state assessments, and not finally, a state sales tax if applicable.

Each year, when some talking head announces the new "tax day" (that mythical and elusive day of the year at which time you are supposedly able to begin actually working for yourself instead of the government) it means very little but offers another opportunity to mutter "bullshit!" again.
Tax on the front end and the back end becomes unnecessary
written by Jim, June 08, 2013 7:21
@chris engel is right - lifting the cap on FICA tax basis - including capital gains - would bring enough revenue into the Social Security system to obviate taxation of Social Security benefits after retirement. It's the simplest and most obvious solution.
Taxation of Social Security benefits
written by Mike B., June 09, 2013 7:17
bmz - I have tried before to figure out the taxation of Social Security benefits and your comment inspired me to try again. I think a single person with $20,000 in Social Security benefits would pay a marginal rate of 46.25% on non-Social Security income in the $33600-38700 range. Below that, he or she would be in the 15% bracket (and have a marginal rate of 27.75% above $24000). Above $38700, the maximum (85%) of Social Security benefits are taxed, so the marginal rate on other income drops back to 25%. So it seems to me that the high marginal rate on other income applies to only a narrow range of income.

I'm not saying this taxation is fair - taxation of Social Security benefits seems to start at $15000 non-Social Security income in this case, which is quite low (making the marginal rate 22.5% once the person enters the 15% bracket - at this income 50% of Social Security is taxed).

I welcome any corrections to these numbers if anyone cares to figure it out.
It's even worse
written by John Glover, June 12, 2013 12:40
Of course, it helps when you start off with accurate numbers.

Actually, the $197K figure is the average income for the top 5%, not the top 10%.

When you start of with exaggerated numbers, you get exaggerated benefits out of means testing....
Wage vs. Barter
written by John K, June 13, 2013 1:37

Barter is reportable as income but hard to track. Barter with people you trust.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.