Distributional Effects of Means Testing Social Security: An Exploratory Analysis
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 lifetime W2 earnings. The empirical analysis is based on data from the Health and Retirement Study. These means tests would reduce total lifetime household benefits by 7 to 9 percentage points. 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.
This work was supported by a grant from the Social Security Administration through the Michigan Retirement Research Center (UM14-01), with a subcontract to Dartmouth College. The findings and conclusions expressed are solely those of the authors and do not represent the views of the Social Security Administration, any agency of the Federal government, the Michigan Retirement Research Center or the NBER. We would like to thank Howard Iams, Erzo Luttmer and Steven Venti for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.