Key Findings Details
Distributional Effects of Means Testing Social Security: An Exploratory Analysis
Alan L. Gustman, Thomas L. Steinmeier and Nahid Tabatabai
- In a sample from the Health and Retirement Study, means tests of Social Security reducing the benefits of those falling in the top quarter of all households based on means, defined as Average Indexed Monthly Earnings (AIME), or total wealth, or pension wealth, would reduce total household benefits by 7 to 9 percentage points, amounting to 15.4 to 16.4 percent of the benefits of affected workers at baseline. The means test would reduce the replacement rate up to the first bracket in the Primary Insurance Amount (PIA) formula from 90 percent to 40 percent.
- As the basis for the means test is changed, different households are affected. It will make a great deal of difference, at least to some households, which definition of means is chosen.
- Which measure of means is chosen will make a great deal of difference to policymakers holding specific views as to how best to define means. For example, if a policy maker believes that wealth is the appropriate basis for a means test, but another basis for means testing is in fact selected, households that are held by the policymaker to have low means will nevertheless suffer a reduction of benefits.
- Many households labeled as having high means when ranked by a particular criterion, whether it is lifetime covered earnings, wealth, or pension wealth, will not have their benefits reduced by the same amount.