Andrew Biggs on Means Testing
While Heritage cites the current taxation of Social Security benefits and progressive Medicare parts B and D premiums in defense of its reforms, the effects of its proposed means tests would be more than an order of magnitude larger. Even under Heritage’s accompanying proposals to reform the tax code — replacing the current system with a flat tax of about 25% — total marginal tax rates in retirement could reach 72%.
This is from Andrew G. Biggs, “Means Testing and its Limits.” National Affairs. Issue No. 9. Fall 2011.
Biggs’s article is the BEST piece I have read on means testing Medicare and Social Security. He takes no cheap shots but lays everything out so that you can see the pros and cons. One of the points he makes is that if the government means tests based on wealth and not just income (he doesn’t say this but wealth and income, though highly correlated, are, I believe, least correlated for retirees), we will have a much more intrusive IRS. He also points out that one way to do means testing that does not penalize savers is to do so based on lifetime income and the lifetime income data are easily available to the Social Security administration. Earlier this year, Scott Sumner had proposed means testing based on lifetime income to avoid penalizing savers.
Biggs makes the point that we have essentially run out of time for any gradual solution. Such solutions could have been implemented in the 1980s or 1990s, but that train is almost at the cliff, to mix metaphors.
HT to Greg Mankiw.