Distributional Effects of Means Testing Social Security: An Exploratory Analysis
Alan Gustman (),
Thomas Steinmeier and
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Thomas Steinmeier: Texas Tech University
Nahid Tabatabai: Title: Dartmouth College
Working Papers from University of Michigan, Michigan Retirement Research Center
This paper examines the distributional implications of introducing additional means testing of Social Security benefits where proceeds are used to help balance Social Security’s finances. Benefits of the top quarter of households ranked according to the relevant measure of means are reduced using a modified version of the Social Security Windfall Elimination Provision (WEP). The replacement rate in the first bracket of the benefit formula, determining the Primary Insurance Amount (PIA), would be reduced from 90 percent to 40 percent of Average Indexed Monthly Earnings (AIME). Four measures of means are considered: total wealth; an annualized measure of AIME; the wealth value of pensions; and a measure of average indexed W2 earnings. The empirical analysis, based on data from the Health and Retirement Study, starts with a baseline benefit for each household, calculated as the product of the average benefit-tax ratio under the current system, multiplied by the taxes paid by the household. These means tests 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. We find that the basis for means testing Social Security makes a substantial difference as to which households have their benefits reduced, and that different means tests may have different effects on the benefits of families in similar circumstance. We also find that the measure of means used to evaluate the effects of a means test makes a considerable difference as to how one would view the effects of the means test on the distribution of benefits.
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Working Paper: Distributional Effects of Means Testing Social Security: An Exploratory Analysis (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:mrr:papers:wp306
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