Government July 1998

Nine Misconceptions About Social Security

To take a voguish example: Privatize Social Security? Any money saved would be eaten up in Wall Street transaction costs, including million-dollar salaries

9. Social Security gives tens of billions of dollars each year to senior citizens who don't need it. This money could be better used to support poor children.

Most of the elderly are not very well off. Their median household income is only about $18,000. However, even if they were better off, it would be hard to justify taking away their Social Security on either moral or economic grounds.

Social Security is a social-insurance program, not a welfare program. People pay into it during their working lives. They have a right to expect something in return, just as they expect interest payments when they buy a government bond. Social Security is already progressive: the rate of return on tax payments is much lower for the wealthy than for the poor. This progressivity is enhanced by the fact that Social Security income is taxable for middle- and high-income retirees but not for low-income retirees. If benefits for higher-income retirees were cut back further, those people would be receiving virtually no return for the taxes they paid in. This would be certain to undermine support for the program.

From an economic standpoint, means testing or any other way of denying benefits to the wealthy would be foolish, because it would give people a great incentive to hide income and thereby pass the means test. There are many ways this could be done. Parents could pass most of their assets on to their children and then continue to collect full benefits. People could move their money into assets that don't yield an annual income, such as land or some kinds of stock. Most of the income of retirees is from accumulated assets, which makes it much easier to hide than wage income. Means testing would in effect place a very high marginal tax rate on senior citizens, giving them a strong incentive to find ways to evade taxes. It may be desirable to get more revenue from the wealthy, but means testing for Social Security makes about as much sense as means testing for interest on government bonds.

Dean Baker is the author of Getting Prices Right: The Battle Over the Consumer Price Index (1997).
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