Saturday, July 12, 2008

Saul Friedman: “Do the wealthy deserve Social Security benefits?”

Saul Friedman writes on seniors issues for Newsday, and while I don't always agree with his viewpoints his column is worth reading. This week in particular, where he looks at the question of how progressive Social Security should be and whether a means-test for higher income retirees should be considered. Here's part of it:

…Social Security is not an entitlement like welfare that can be cut off if we earn too much. All of us, rich and not so rich, have paid into Social Security. It is a guaranteed defined benefit pension program, which also provides insurance benefits for survivors and minor children of a worker who has died.

More important are the principles of Social Security, which has made it work for more than 70 years - through wars, several recessions, stock market crashes, savings and loan failures and the current economic chaos. Here's political scientist Max Skidmore, in his new book, "Securing America's Future":

"Means-testing Social Security would change its nature and destroy the system. Universal coverage, regardless of need, is one of Social Security's strong points. Millionaires do receive benefits, but they also pay into the system. Their benefits represent a smaller return on what they pay than do the benefits of lower-paid workers."

Just as a company's pension system does not take into account a beneficiary's needs, Skidmore writes, "Building in 'need' as a criterion to qualify for benefits would require the majority of Americans to contribute for a lifetime to a program from which they could draw no benefits."

This question becomes important when we think about Sen. Obama's proposals, which would shift the tax burden significantly to the rich by imposing new taxes above $250,000 and providing a refundable income tax credit to low/middle earners to compensate them for payroll taxes. Likewise, President Bush's plan for "progressive indexing" for benefits would have imposed significant reductions on high earners, modest reductions on middle earners, and no reductions at all on low earners. While some take it for granted that Social Security reform should be highly progressive, and argue only over whether it should be accomplished on the tax or the benefit end, policymakers should bear in mind how that may alter the not-particularly-progressive tax/benefit structure Social Security has had since its founding.


Patrick R. Sullivan said...

What do you know about Canada's three tier system:

As I understand it they have something like a negative income tax for the poorest Canadians paid from general tax Revenues.

A second tie--corresponding to Social Security--funded by a payroll tax, that is partially (and increasingly) an investment program, with a government agency doing the investing in stocks, bonds, and real estate.

Finally the government encourages all Canadians to have their own individual (IRA-like)accounts in which you make your own investment decisions.

Andrew G. Biggs said...


I'm not an expert on the Canadian system, but you can find more info on it here:

I've gotten more attracted to the basic structure that they've put together, although I'd probably simplify things a bit where possible. A flat universal pension to protect against poverty (this would encompass the redistributive end of Social Security, plus SSI); an mandatory earnings related pension built on a funded basis (I'd prefer DC, although Canada goes DB and you can argue for either); plus voluntary individual savings on top. It's a cleaner approach than the SSI/Social Security/401(k) combination we currently have.


Bruce Webb said...

Means testing and/or cap increases are attempts to undermine Social Security politically. Some people advocati ng either may be duped or they may be dupers. Clear eyed supporters of the current system are neither fooled or amused.

Andrew G. Biggs said...

Bruce -
I will have a paper out soon that makes a very similar argument. Great minds...

Bruce Webb said...

I'll be putting up a new post at AB shortly. In it I will discuss the little known Title 1 of the original Social Security act, the Title that set up a general fund supported old age pension scheme alongside the Title 2 old age insurance plan that we now think of as Social Security. It would seem that FDR by design decided to transition from a stopgap program that fairly could be called welfare or even socialistic (Title 1) to a plan that would be totally funded by workers (Title 2 OAS).

That is not only did FDR arguably rescue capitalism he also imposed and then gradually lifted the responsibility for capital to pay federal old age pensions. Which is to say the full implementation of Social Security after about 1950 in effect meant a tax cut for capital. Needless to say not the typical narrative when it comes to 'class traitor' FDR.