David R. Henderson  

Andrew Biggs on Means Testing

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While Heritage cites the current taxation of Social Security benefits and progressive Medicare parts B and D premiums in defense of its reforms, the effects of its proposed means tests would be more than an order of magnitude larger. Even under Heritage's accompanying proposals to reform the tax code -- replacing the current system with a flat tax of about 25% -- total marginal tax rates in retirement could reach 72%.
This is from Andrew G. Biggs, "Means Testing and its Limits." National Affairs. Issue No. 9. Fall 2011.

Biggs's article is the BEST piece I have read on means testing Medicare and Social Security. He takes no cheap shots but lays everything out so that you can see the pros and cons. One of the points he makes is that if the government means tests based on wealth and not just income (he doesn't say this but wealth and income, though highly correlated, are, I believe, least correlated for retirees), we will have a much more intrusive IRS. He also points out that one way to do means testing that does not penalize savers is to do so based on lifetime income and the lifetime income data are easily available to the Social Security administration. Earlier this year, Scott Sumner had proposed means testing based on lifetime income to avoid penalizing savers.

Biggs makes the point that we have essentially run out of time for any gradual solution. Such solutions could have been implemented in the 1980s or 1990s, but that train is almost at the cliff, to mix metaphors.

HT to Greg Mankiw.

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COMMENTS (4 to date)
Dan Hill writes:

"we will have a much more intrusive IRS"

Absolutely. Australia has a system which means tests benefits based on both income and assets. The assets examination is particularly intrusive and gives rise to a whole series of regulations to prevent "hiding" of assets including restrictions on how much and how quickly assets can be transferred to relatives while you are still alive.

mark writes:

I can't imagine that means testing for wealth is even possible on the scale that would be required. Recall that, unlike Medicare, Social Security is a capped and fixed payment. Honestly, I would think the cost of testing could exceed the dollars saved. Maybe it is a disguised jobs program.

Lord writes:

By far the simplest method for means testing is .. raising the cap on FICA taxes. It would actually accomplish that tax on lifetime earnings.

Joseph Teicher writes:

If you means test based on lifetime income do you just give up on social security/medicare being a safety net? Because plenty of people have high lifetime earnings and then blow it in various ways. Are they just SOL when they get old?

To me the way to means test this stuff is to let people self-select. Just say that if you want the government to pay for your retirement you have to live in a crappy government retirement home and aren't allowed to have any property. That would be simple and cheap because most people would save to provide for themselves or rely on their children or whatever and the people who actually needed it would get help. All problems solved!

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