The United States may be the “land of the free and the home of the brave,” the “sweet land of liberty,” the “land of the noble free,” and a “city on a hill,” but it is, unfortunately, also a vast welfare state. Indeed, as has been pointed out by economist Walter Williams of George Mason University, “Tragically, two-thirds to three-quarters of the federal budget can be described as Congress taking the rightful earnings of one American to give to another American — using one American to serve another.”
In one of the appendices to Marriage Penalties in Means-Tested Tax and Transfer Programs: Issues and Options, there is a list of 89 federal means-tested welfare programs. The three best-known programs are the Supplemental Nutrition Assistance Program (SNAP [formerly called food stamps]); Medicaid, government-funded health care for poor Americans of any age and people with certain disabilities; and Temporary Assistance to Needy Families (TANF), which distributes cash directly to welfare recipients.
Other means-tested welfare programs include the Low Income Home Energy Assistance Program (LIHEAP); the Children’s Health Insurance Program (CHIP); Women, Infants, and Children (WIC); Head Start; Healthy Start; Supplemental Security Income (SSI); the National School Lunch Program (NSLP); the School Breakfast Program (SBP); the Commodity Supplemental Food Program (CSFP); and Pell grants for college students.
Some welfare programs don’t have means tests, and are therefore usually not viewed as welfare programs, although they certainly are. They include Unemployment Compensation, refundable tax credits, Medicare, and Social Security.
The crown jewel of the U.S. welfare state is Social Security. But although it has “trust funds” with a combined balance of $2.9 trillion, all is not well with the Social Security system. Since 2010, total expenditures of Social Security have exceeded the non-interest income of its combined trust funds. According to The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, the trust funds “would be able to pay scheduled benefits on a timely basis until 2035.” After that, “the combined funds’ reserves will become depleted and continuing tax income will be sufficient to pay 79 percent of scheduled benefits.”
For many years now, a variety of plans have been put forward to save Social Security for senior citizens and protect the long-term viability of the program for future generations. They include raising the retirement age (which the government last did in 1983), raising the tax rate (which the government last did in 1990), increasing the payroll-tax cap (which the government does incrementally each year), and reducing benefits (which the government has done by taxing benefits since 1984).
The one proposal that has never been undertaken by the government to fortify Social Security is the reduction of benefits by means-testing recipients.
Late last year, a resident scholar and a visiting scholar at the right-leaning American Enterprise Institute (AEI) published two articles (article 1, article 2) in Tax Notes Federal on ways to reform Social Security so as to bring benefits and revenue into balance by making the program more progressive. Although they acknowledge that Social Security tax increases or increases in the earnings cap generally increase the progressivity of payroll taxes, they focus instead on two broad strategies to increase the progressivity of benefits: “One strategy reduces benefits for retirees with higher current annual incomes. The other strategy reduces benefits for retirees with higher lifetime labor earnings. Although neither strategy is perfect, we believe that targeting benefits based on lifetime labor earnings is superior.” Consequently, in their first article, they “detail the flaws of income-based means testing,” and in the second, they “outline how targeting benefits to those with low lifetime labor earnings can increase” the progressivity of Social Security “while avoiding most of the drawbacks of income-based means testing.” They conclude that because “annual income in retirement is often a flawed measure of individuals’ need for benefits” and “means tests based on annual income discourage recipients from working and saving,”
Reducing benefits to those with higher lifetime labor earnings rather than to those with higher annual incomes in retirement offers a better way to increase benefit progressivity. Such a policy has far fewer disincentive effects and is easy to administer based on data already possessed by the SSA. In many, though not all, respects, lifetime labor earnings also offers a better measure of need.
Back in 2011, the Heritage Foundation released a budget plan that would begin phasing out Social Security benefits at incomes of $55,000 (individuals) and $110,000 (married couples) and eliminate all benefits once income reached $110,000 (individuals) and $165,000 (married couples). In conjunction with that, the taxation of Social Security benefits would be ended.
In 2015, Republican presidential candidate and governor of New Jersey Chris Christie proposed something similar as part of his comprehensive plan to address Social Security’s looming insolvency.
In arguing against means-testing Social Security benefits, Virginia Reno, of the National Academy of Social Insurance, asserts,
Benefits are an earned right based on earnings from which premiums are deducted, as payroll taxes.
Means testing Social Security would fundamentally change it from social insurance (a universal system of benefits earned by all who have paid in) to welfare (a system requiring you to prove you are needy in order to qualify for benefits).
But the proposals for the means-testing of Social Security benefits inadvertently show that Social Security is already a welfare program.
If Social Security were really “a universal system of benefits earned by all who have paid in,” then it wouldn’t matter how many assets you had, what your net worth was, or what your income was after you began receiving Social Security benefits. None of those things should affect your Social Security at all.
Social Security is welfare because there is no connection between the taxes one pays into the system and the benefits that one receives from the system. Social Security is welfare because there is no contractual right to receive benefits. Social Security is welfare because Congress can reduce or eliminate benefits at will. Social Security has been welfare from the very beginning. The first recipients of Social Security paid little or nothing into the system. They just started getting a check from the government when they retired.
Reno also maintains that “means testing would likely cut benefits for the broad middle class, because only a very small share of benefits goes to wealthy people.” She mentions that baby boomers are “counting heavily on Social Security.” But there is no retirement crisis in America.
According to the Internal Revenue Service (IRS), “From 1979 through 2016, the salaries of working-age households grew by 39 percent above inflation. But over that same period, incomes for households whose members are 65 and older grew by 90 percent, over twice as fast. Over the past three decades, seniors have gone from being a disproportionately poor segment of the population to a rich one.”
According to the Federal Reserve, “Across all age groups, retirement savings have at least doubled relative to the salaries those savings must replace once Americans retire. Among households age 55 to 69, retirement savings grew from 232 percent of annual earnings in 1989 to 471 percent in 2016. For households age 40 to 54, pension entitlements rose from 88 percent to 212 percent of average annual earnings, and from 30 percent to 80 percent of earnings for households aged 40 and under.”
And according to the Social Security Administration (SSA), “Americans born between 1926 and 1935 had a median retirement income equal to 111 percent of their inflation-adjusted career-average earnings. Only 25 percent of those retirees had replacement rates below 75 percent. Now fast-forward to the GenXers, born between 1966 and 1974. The SSA model projects that the median GenXer will have a retirement income replacement rate of 115 percent, with only 23 percent of retirees falling below a 75 percent replacement rate.”
Social Security is just an intergenerational wealth-redistribution scheme. As such, the program should not exist. But since it does exist, and doesn’t appear to be going away any time soon, it should be means-tested just as other welfare programs are. The fewer Americans that qualify for it, the better. How the government makes that determination is irrelevant.
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