Means-Testing Troubles

Yuval Levin's provocative essay on going "Beyond the Welfare State" offers the following prescription for a conservative re-thinking of entitlements:

Second, essentially all government benefits — including benefits for the elderly — should be means-tested so that those in greater need receive more help and those who are not needy do not become dependent on public support. Most retirees would still receive some public benefits (and the poorest could well get more than they do now), but the design of our welfare programs would avoid creating the misimpression that they are savings programs. People who are already retired or nearly so today should be exempted from such means-testing, as they have planned for decades around the existing system; Americans below 55 or so, however, should expect public help only if they are in need once they retire. Means-testing should, to the extent possible, be designed to avoid discouraging saving and work. And private retirement savings should be strongly encouraged and incentivized, so that people who have the means would build private nest eggs with less reliance on government.

Means-testing for entitlements for the elderly has been notion recently gaining in popularity among some sectors of the right, but I think there is reason for some skepticism about means-testing all elderly entitlements, particularly Social Security.

One of the more dangerous aspects of Great Society-style welfare was its encouragement of unsustainable and deleterious behaviors. Welfare checks provided to single mothers were no doubt motivated by a worthy spirit of compassion, but those very same checks indirectly financed the breakdown of the urban family. Rather than ending misery, they often ended up subsidizing it. Unlike private charity, government subsidies can create a sense of entitlement that may undermine the behaviors necessary to support a government capable of providing such subsidies.

As it stands now, Social Security mostly avoids that trap. Whether you manage your resources well in retirement or manage them poorly, you receive the same check. Far from encouraging bad economic behavior, Social Security tends to reward good economic behavior: if you achieve success in the workplace and improve your salary, you also reap a higher Social Security check when you retire. But even if you struggle in the workplace, you still will collect some benefit to help you in your old age. In many respects, this is exactly how government should work from a conservative perspective: it rewards industry but also provides a safety net for the less fortunate.

Means-testing could utterly vitiate that structural tendency. Instead of rewarding a person for economic success over a career, means-testing for Social Security could penalize them for this success. Levin notes some of the challenges of means-testing when he says that means-testing "should, to the extent possible, be designed to avoid discouraging saving and work." Yet I think it might be very hard to means-test Social Security so that it did not discourage saving and work.

If we means-tested Social Security based on the net-worth of a household, we would give the elderly little incentive to save. Say government offers the following choice: live close to the bone for years until you exhaust your savings and then get a Social Security benefit OR spend it extravagantly and then get that very same benefit. What choice would many people make? While elderly men and women are unlikely to start an explosion of illegitimacy (thankfully), subsidizing profligacy and discouraging prudence are rarely smart policies for a government; our current economic troubles are testament to the dangers of that course of action.

Means-testing on income could result in a significant lowering of the standard of living for the elderly. Right now, elderly Americans who have some level of health can work to supplement their Social Security income and so raise their standard of living. Means-testing could take that incentive away. The elderly could sit home and collect that government check OR they could go out and work, with the dollars earned in the workplace eating into their government checks. Many people of an advanced age would find it hard to earn enough in the market in order to make more than their government-guaranteed income, so many elderly Americans might find Social Security checks the absolute limit for their income.

I suppose some of these doubts are predicated on my suspicion that Social Security is not driving any potential entitlements crisis. Currently around 4.8% of GDP, Social Security is scheduled to peak at around 6.1% of GDP and stay around there for as far as federal actuarial accounting can see. That is a manageable number and a manageable increase. Many deficits the program may face could be eliminated by making a few relatively minor changes to the program (such as raising the cap on taxable income). Compared to something like Medicare, Social Security is very sustainable.

Granted, some of these objections could be worked around, but fiddling with Social Security is a dangerous business, and not only from a short-term electoral perspective. Compared to many government programs (including many means-tested ones), Social Security provides a social insurance safety net of equity while also encouraging individual initiative and prudence. Those advantages should not be overlooked.

(Crossposted at FrumForum)

A Social Security Crisis?

In bewailing the "entitlements crisis," many have made much of the fact that the percentage of GDP expended on Social Security, Medicare, and Medicaid is growing at a fairly ferocious pace. In 2007, those three programs totaled 8.4% of the GDP. By 2050, the CBO estimates they could be 18.6% of GDP. By 2080, they could be nearing 25% of GDP. The current federal budget as a whole is 25% of GDP, and that recently spiked (it was under or around 20% for most of the past 15 years). So, if current trends do not change (a colossal if), federal spending on just three programs would be as big as a proportion of the economy as the whole federal budget is now. Those numbers would probably not be sustainable.

However, grouping those three programs together hides a significant fact: the driving force behind the inflation of those "entitlement" programs is the increase in medical spending. Social Security spending is far more sustainable than the current Medicare and Medicaid regimes.

Currently, Social Security spending is about 4.8% of the GDP. This spending is estimated to rise to about 6.1% of the GDP by 2035 and will linger around 6% for the next fifty years after that. This is about a 27% increase in Social Security spending as a percentage of GDP. That's not a small number, but it is a manageable one, especially when one considers that that period will witness the retirement of the Baby Boomers. If it gets its economic house in order, the US could conceivably afford to spend 6% of its GDP on Social Security for a very long time.

Moreover, due to reforms during the Reagan era, Social Security is more sustainable now than it used to be. According to the Congressional Research Service, the worker earning an average income who retired at 65 in 1980 drew out more in benefits than he had put in through taxes and accumulated interest in less than three years. An average 65-year-old retiring in 2002 would have to collect for almost 17 years for that to happen; the retirees of 2020 would have to collect for nearly 21 years to reach that point. (And, yes, I realize that those figures could also be used to argue for a kind of privatization, but let's focus on fiscal sustainability for the moment. I also realize that the federal government has borrowed against the Social Security "surplus" of past decades, and that a time will come, if it has not already come, when the federal government must pay back the billions and billions and billions it owes to the Social Security system.)

If there is an eventual crisis for Social Security (the status of SS crises depend upon assumptions about rates of economic growth, employment, and other factors, leading to various projections), the solutions to make Social Security more sustainable seem relatively clear cut. Raising the cap on incomes taxed for Social Security (the current max is around $106,000) and slightly changing the retirement age---to suggest two obvious choices---could extend Social Security's sustainability for a long time.

It may be Pollyannaish to suggest that a few minor changes could indefinitely protect Social Security, but it is realistic to say that those changes are minor compared to the ones needed for Medicare and Medicaid. That's where the real growth in spending is. Health-care spending has long exceeded the rate of inflation, and, with an aging population, that spending is only increasing at a faster rate.

For Medicare and Medicaid, the options are a lot harder. Because Social Security works on a fixed-benefit model, the costs are easier to project and, if needed, easier to curb. Federal health expenditures have long operated upon a blank check model, and there seems to be considerable waste in federal health-care spending. But finding strategies to identify that waste and cut it is a much more challenging proposition. I think effective savings can be found, but achieving them will acquire bureaucratic know-how and determination.

Some Republicans may find themselves in a hard place in terms of dealing with Medicare/Medicaid spending. Barack Obama's proposals to cut the rate of growth of Medicare spending were met with cries of "death panels." Over the past few years, many Republicans allied themselves with protecting Medicare funding. Yet now Republicans want to talk about seriously cutting the deficit, and photo-op cuts to the "discretionary" side would offer marginally cosmetic changes to the budget at best. (None of this is to suggest that I find the supposed "savings" of Obamacare particularly persuasive.)

There may be something to be said for various Social Security reforms. But Social Security does not seem to be ground zero for the government's fiscal crisis; the fiscal necessities for reform there are far less pressing than those for other parts of the federal budget.

Two points in closing:

The first is electoral. Social Security is one of the most popular government programs. According to a recent Wall Street Journal poll, 77% of Americans find cutting Social Security to be unacceptable. Kicking grandma off of Social Security while also advocating for ever-expanding tax cuts for the wealthiest Americans (who have been the real economic winners of the past decade) is the electoral equivalent of running into machine-gun fire.

The second is more principled. From a small-government perspective (or at least from my perspective), Social Security is far from the most invasive program or the force that most undermines the sustainability of our nation as a free-market economy. If conservatives do want to advance the cause of a smaller government, there are, I think, much bigger and more pressing fish to fry. Reckless financialization, the hollowing out of the middle class, government distortions of the market through cronyish favoritism, the decay of the family---all these things are much more dangerous to the future of individual liberty vis-a-vis the government than Social Security.


(Crossposted at Frum Forum)