Wednesday, April 13, 2011

Severing the Link on SS

One of the easier means of bringing social security into balance is means testing it. Such a policy would likely bring social security into balance and would do so while protecting the most vulnerable. This solution is generally favored by right of center policy types whereas left of center policy types dislike means testing as it would undermine the universal nature of Social Security and render it more like welfare. The ironic thing though is that left of center policy types also favor means testing but conducted through a different mechanisim, lifting the payroll cap. Lifting the payroll cap itself does very little to balance social security as revenues and benefits are tied. So if you pay more taxes into the system you will also get higher benefits. Some modest savings would be generated as the benefit formula is somewhat progressive (though the distributional effect of social security is probably slightly regressive when you take into account the correlation between wealth and health). However, thus the only way to actually balance social security by lifting the cap is to the sever the link between revenues and benefits. At that point you have made social security much more redistributive and undermined its universality. Sort of sounds like welfare. And in the end, there isn't anything wrong with welfare, a just and decent society provides a safety net. But let us not fool ourselves, Social Security reform is not a discussion about preserving it as a universal entitlement, it is whether means testing will be affected by higher taxes or lower benefits. Given that you can only raise so much in revenues, and we will need to raise significant amounts for medicare, it seems the sensible solution is to means test through lowering benefits for the well off.

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