Cato Scholar Makes Case for Means-Testing Social Security

Ultimately, Boccia believes, Congress should means-test Social Security, returning to the program's stated purpose of antipoverty protection in old age.

Chained CPI

Short of fundamentally refocusing the purpose of the Social Security program, Boccia says, more modest reforms could also make a big difference. For example, she says lawmakers should index Social Security's cost-of-living adjustments to the more accurate chained consumer price index, as opposed to the Consumer Price Index for Urban Consumers and Clerical Workers (CPI-W). Boccia says this approach would acknowledge that people choose less expensive and different goods and services in response to changes in prices.

"According to the Social Security Administration, this reform would eliminate about one‐​fifth of Social Security's long‐​term fiscal imbalance," Boccia says. "This approach would more accurately protect the value of benefits from the impact of inflation on beneficiaries' cost of living. The CBO last projected that adopting the chained CPI approach would save Social Security about $150 billion over 10 years."

Payroll Tax Changes

Another change Boccia would recommend is to reduce the rate of the combined employer-employee Social Security payroll tax — currently 12.4% — while significantly raising or even eliminating the wage cap on which the tax applies.

"That approach would be more economically efficient, and it would actually provide tax relief to lower- and middle-income workers," Boccia says. "The current system that sees higher incomes excluded from Social Security taxation has the practical effect of making the overall system much less progressive."

Some Perspective (and Agreement) From the Left

Though his public policy viewpoints may differ substantially, Burtless, a senior fellow in economic studies at the Brookings Institution, shares Boccia's passion for the Social Security solvency topic. His own experience with the topic goes back some four decades to when he served in the federal government, first at the U.S. Department of Health, Education and Welfare, and later at the Labor Department.

According to Burtless, Social Security is of such fundamental, practical and political importance to the average American citizen (and lawmaker) that many of the wholesale changes some experts advocate for seem untenable, even if they are appealing on paper.

For example, while means-testing Social Security to better favor lower-income people may seem like a progressive policy that would be appealing across the political spectrum, such a change runs the risk of undermining the basic viewpoint that all Americans have a stake in the long-term viability of the program.

On the other hand, Burtless says, the idea of raising or eliminating the wage cap for Social Security taxes is one area of relatively broad bipartisan agreement.

"My viewpoint is that no single fix is going to solve our Social Security solvency problem," Burtless tells ThinkAdvisor. "We are going to need a combination of approaches and a significant degree of compromise, but a lot of people think a good place to start would be to address the wage cap."

Burtless says his desire to see the payroll tax cap raised or eliminated stems from a basic economic fact that has emerged over the past four decades. Put simply, the amount of overall earnings enjoyed by Americans with wages above the current cap of $147,000 has grown exponentially in that time, meaning a significantly smaller portion of overall wages in the country are now subject to Social Security taxes.

"Nobody can debate that the income gap between people at the 90th or 95th percentile of earnings and the people at the 50th or 10th percentile has opened dramatically since the 1980s," Burtless says. "This explosion of inequality was not really something that policy professionals foresaw when creating the current Social Security payroll tax framework. There is just so much income today that is exempt from Social Security taxation."

This fact has apparently caught the attention of federal lawmakers, Burtless and Boccia note. One legislative proposal endorsed by President Joe Biden and currently circulating in Congress would reapply the payroll tax to wages above $400,000, "so the wealthy pay the same rate as someone earning $50,000 a year," in the words of the president. Another proposal would set the taxable wage level significantly lower, at $250,000.

Beyond addressing the wage cap, Burtless says, there is also substantial agreement, given the meaningful increases in longevity since the 1980s, that some delay in the age of entitlement for the full Social Security benefit is in order, perhaps to 72 or 75.

"I think there is also some agreement that we could set up a fourth top tier for the highest income earners, wherein the marginal replacement rate for the wealthiest Americans coming from Social Security would drop even more," he says.

Such an approach, Burtless says, would help to ensure that all Americans continue to benefit from Social Security while also acknowledging the current system has grown meaningfully less than originally intended.