August 07, 2015
In case you were wondering whether we can substantially improve the financing of Social Security by means-testing benefits, as Governor Christie advocated in the Republican candidate debate, CEPR has the answer for you. We did a paper a few years back on this very issue.
The key point is that, while the rich have a large share of the income, they don’t have a large share of Social Security benefits. That is what we would expect with a progressive payback structure in a program with a cap on taxable income. When we did the paper, less than 0.6 percent of benefits went to individuals with non-Social Security income over $200,000. Since incomes have risen somewhat in the last five years, it would be around 1.1 percent of benefits today.
However we’re not going to be able to zero out benefits for everyone who has non-Social Security income over $200,000, otherwise we would find lots of people with incomes of $199,900. As a practical matter, we would have to phase out benefits. A rapid phase out would be losing 20 cents of benefits for each dollar that the person’s income exceeds $200,000.
This would mean, for example, that if a person had an income of $220,000, they would see their benefits reduced by $4,000. This creates a very high marginal tax rate (people are also paying income tax), which would presumably mean some response in that people adjust their behavior since they are paying well over 50 cents of an additional dollar of income in taxes. If this was a person who was still working and paying Social Security taxes, the effective marginal tax rate would be over 70 percent.
By our calculations, this 20 percent phase out would reduce Social Security payouts by roughly 0.6 percent of payouts, the equivalent of an increase in the payroll tax of around 0.09 percentage point. That’s not zero, but it does not hugely change the finances of the program.
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