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Progressive Price Indexing is Not Means-Testing -- It's Arbitrary

A journalist recently told me that he was being encouraged by conservatives not to use the term "means-testing" to describe Bush's latest Social Security gambit. The argument was that progressive price indexing does not introduce means-testing to Social Security, since the system is already loosely progressive; it just makes it a little more progressive.

I argued at the time that the term means-testing is appropriate for any plan that makes Social Security a manifestly bad deal for a significant part of the population, as progressive price indexing would do. But in thinking about it further, and looking at some new information, I decided the conservatives were right the first time: It's not means-testing. It's not means-testing because it doesn't actually have anything to do with the question of whether the retiree actually has the "means" to live with reduced Social Security benefits. Because it it reduces benefits for many retirees regardless of their actual financial situation in retirement, it's more like a plan of arbitrary reductions.

For a number of examples of how that would particularly hurt some poor seniors, see this new white paper from the Center on Budget and Policy Priorities. A particularly compelling example is a divorced woman who had spent most of her life out of the workforce, but whose ex-husband had been a high earner. On retirement, under the current system, she gets benefits based on her ex-husband's earnings history, which earns her higher benefits than she would get based on her own. That's a very important protection for a very vulnerable group. But because the ex- was a high-earner before running off with his secretary, those benefits will now be reduced, by about 25%. The same problem would affect widows.

But it's more general than that. One worker might have a modest income averaging about $50,000 throughout his lifetime, and yet because of the costs of his kids' college, an expensive health condition, a few years of unemployment, or a bankrupted pension plan, might never manage to accumulate much savings for retirement. He'll have his benefits cut. Another worker might never earn more than $30,000, but thanks to an old-fashioned defined benefit pension plan, or an inheritance, or selling a house for ten times what he paid for it, is in relatively good shape for retirement. But he'll get close to the full benefit.

That's not progressive. It's arbitrary.

Actually adjusting benefits based on a retirees' real needs and means could be a good idea -- and I say that as someone very wary of jeopardizing the universality of the program. One step in that direction was taken in 1993, when the Clinton budget deal made 85% of Social Security benefits taxable for individuals with incomes over $25,000 or couples with income over $32,000 in retirement. Now that's progressive, and that's actually related to means. How many of the Republicans who are excoriating Democrats for not embracing Bush's plan voted for it? I'll let you guess.

Posted by Mark Schmitt on May 10, 2005 | Permalink


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I think the taxing part is fine, although in general, I'd raise the bar for when the income tax kicks in, but I'd do that for everyone.

Posted by: Abby Vigneron | May 10, 2005 6:53:52 PM

I would suggest "mean testing."

Posted by: Joe S. | May 11, 2005 10:34:04 AM

Thanks for touching on this point. I've meant to say something about this but haven't.

This is also a problem with clawback - your benefits are slashed regardless of whatever setbacks might fall your way. While the alternative of allowing private account holders to gamble with the assurance that they'll be bailed out if they lose is equally perilous, I think you have to assume there will be winning and losing cohorts as well as a distribution of individual returns that has nothing to do with the amount of risk that an individual elected to accept.

If you means test benefits, and then claw reduced benefits back, that might lend a new wrinkle to the biblical addage about those who were first shall be last.

Too bad for the conservatives that they chose to go with a plan that would intentionally maximize winners and losers, rather than staffing their think tanks with folks who are really risk averse.

Posted by: ChasHeath | May 11, 2005 1:11:00 PM