Chris Christie And Means Testing Social Security

In a recent article, I questioned the candor of Chris Christie in his proposed Social Security reform.  Now it is time to question the wisdom.

Governor Christie's proposal contained a controversial policy option of means-testing benefits.  Some believe that phasing-out benefits for higher-income Americans should be the first option to consider for addressing the financing gap in Social Security.  This alternative should be the last.  It introduces terrible incentives to the system, and begs questions about how we pay for benefits. 

Supporters of this policy option argue that this approach narrows the imbalances without disrupting the retirement plans of existing seniors.  This alternative appeals to politicians because it affects few current voters, and fosters a feeling of responsibility that we are doing something about a predictable crisis.

The foreshadows of that crisis are well documented.  According to the Social Security Administration, the system has less than a break-even chance of paying full benefits through 2033.  That means someone who reaches normal retirement age this year expects to outlive the system’s ability to pay scheduled benefits.

Would eliminating the benefits of the affluent make a difference?  Not really. In one example, the Social Security Administration projected that means-testing benefits would not even change the date of the projected exhaustion point of the trust fund.  Mind you, that projection assumes that no one tries to avoid the reduction in benefits.

The fact is that people will try to avoid losing benefits.  A means-test serves as an implicit tax on savings, which will discourage savings and deflate economic activity.  The consequence is to discourage people from saving outside of the system.  These rules would unintentionally change the system that was created to provide a buffer against poverty-ridden old-age, into one that fosters it.

Means-testing Social Security largely postpones the crisis only to have it grow in consequence. By removing savers from the system, the mix of beneficiaries will increase overtime in both number and dependency upon the system. We are essentially shifting deck chairs on the Titanic to make room on the boat for more passengers who don't swim very well.

Means-testing creates a more serious problem for how we pay for Social Security benefits.
Today the system is self-financed.  That means it borrows money from workers in exchange for the promise of future benefits.  This proposal takes money in exchange for nothing. 

One is a contribution and the other is a purely a tax. The distinction is critical to Social Security because a tax brings along the question of priority.  Taxes are allocated yearly based on political priority.  A contribution is dedicated financing over time.  Social Security has grown into the largest expense in the budget in large part because of the perception that benefits are paid for by contribution.

Social Security's position within the budget becomes more precarious as we shift the way we pay for the system from contribution to tax. Voters will ask whether it is a wise use of public money to provide a subsidy to the people who had the best jobs over the longest careers. They will ask whether it is fair to pay husbands twice as much as wives.  Benefits make a lot of sense when we pay for them with contributions. 

FDR did not want politicians deciding who needs and who doesn't need benefits.  He wanted workers to have 'a legal, moral, and political right' to benefits.  FDR did not want the needs of the elderly to be just another political priority. 

Social Security was intended to be old-age insurance, a hedge against the cost of the unknown.  It was based on four characteristics only one of which remains, that benefits should not be means-tested or based on need.  If we preserve none of the qualities of Social Security, why are we keeping the name?

It is possible to say that the world has changed since 1935.  It is possible to say that the system has become more progressive since that time.  It is possible to say that means testing Social Security benefits simply extends those changes that we have made over time.

What it is not possible to say is that means-testing Social Security makes it work.  It fixes the system by giving it a new purpose much like fixing a hole in the wall by calling it a window. 

Chris Christie And Honesty About Social Security

This article originally appeared on TheHill.

Last week, Governor Chris Christie dedicated time to champion entitlement reform at a 4-stop tour through New Hampshire. The governor said “Washington is afraid to have an honest conversation about Social Security, Medicare and Medicaid with the people of our country. I am not.”

 

So let's be honest.

 

The Trustees will soon release the 2015 Trustees Report which will give us new insight to the financial imbalances in Social Security. In the report issued last year, the Trustees projected that the financing constraints of the system will emerge in 2033, forcing a 23% reduction in benefits. That exhaustion point means that someone who turns 67 today on average expects to outlive scheduled benefits.

 

To be honest, the proposal that Governor Christie laid out does not “fix” Social Security.  The changes do not even assure us that Social Security will function for 75 years, roughly the time to get most existing contributors through retirement. The Committee for a Responsible Federal Budget projects that his changes create about 60% of the savings necessary to kick the can once again.

 

The biggest problem with Christie’s proposal is that the components do not address the structural issues within Social Security that are causing the imbalances reported by the Trustees. The package in total simply takes the projected reduction of benefits and codifies on whom the reductions will fall.

 

His proposal calls for the normal retirement age to increase gradually to 69.  What does a change in retirement age mean to someone who is 50? The person can still retire at 67, but with the lower benefit levels offered by early retirement.  Those rules translate into a 13.3% reduction of benefits for someone who elects to keep the retirement age that he has today.

 

This change would make sense if the problems within Social Security derived from increases in life expectancy of future retirees. The Social Security Administration projects that the life expectancy of a retiree will rise about 2.5 years between 1980 and 2030.  If adopted, Christie’s plan would make the increase the normal retirement age by 4 years over that time.

 

While Christie is telling the truth that Americans are living longer, he isn’t telling the whole truth.  The research of the Social Security Administration reveals that the largest increases in life expectancy occur at a time of life when people are generally contributing to rather than collecting from Social Security.

 

Christie’s proposal also includes the adoption of the Chain-CPI for future COLA adjustments.  He says that this measure tracks inflation more accurately. This is however not true.

 

If we are going to be honest, Chain-CPI does not measure actual inflation.  It measures in part how people respond to inflation. If I decide, for example, that my health insurance is too expensive, and increase my deductible so that my premium remains the same, Chain-CPI says that the cost of living hasn’t changed because I use less expensive insurance.

 

The use of Chain-CPI is a benefit cut which reduces buying power of benefits over time. This alternative is a very strange way to fix old-age insurance because the change progressively reduces benefit levels as someone ages.  The use of Chain-CPI for Social Security’s COLAs is somewhat like fire insurance which decreases its coverage as more rooms of a house burn.

 

The governor’s proposal would introduce the idea of means-testing the program. While some estimate that this change will save the program a lot of money, this alternative breaks a founding principle of the program.  Social Security should provide benefits without a means or needs test. 

 

The reasoning for this principle is sound.  The program was created to lower the likelihood that a retiree might fall into poverty-ridden old-age.  A means-test tends to discourage the savings that actually prevents poverty-ridden old-age. This approach is a strange way to fix Social Security.

 

If we are going to be honest, the worker who is 50 and younger is likely better off rejecting Christie’s proposal, and accepting the estimated 23% reduction in benefits when the Trust Fund is exhausted. The governor’s vision of Social Security offers even less benefits, and less protection of those benefits.  It secures the future mainly for politicians who get to argue about who is ‘fortunate enough not to need’ Social Security as today’s workers approach retirement.

 

But let’s be completely honest.  Governor Christie’s solution is a stop-gap measure that solves the problems for today’s politicians rather the concerns of the retirees who depend upon the system.  Today’s 50 year-old will be in 20 years back at the table of politics explaining to his children’s generation that Social Security will work if they just accept less.