Means-Testing and Political Economy
By Bryan Caplan
Why not means-test Social Security and Medicare? On the surface, this seems like a perfect liberaltarian reform. Libertarians should favor drastic cuts in government spending, liberals should favor drastic cuts in government spending on the rich, and both should favor the brighter fiscal future that the means-testing of major programs implies.
I’ve converted several libertarians to the gospel of means-testing, but – to the best of my knowledge – zero liberals. What gives?
The standard liberal objection is that means-testing puts us on the slippery slope to abolition. Once we means-test Social Security and Medicare, voters will perceive these programs as mere “welfare.” And Americans hate welfare. To preserve transfers to needy Americans, we have to keep these programs universal.
These fears inspire the following hypothetical. Suppose the U.S. adopted the following means-testing formula for Social Security and Medicare:
1. Full benefits for everyone below median income.
2. For everyone above median income: For every percentage-point by which your income exceeds the 50th percentile, your benefit goes down by 2 percentage-points. So if you’re at the 53rd percentile, you only get 94% (=100-2*[53-50])% of the full benefit. If you’re at the 90th percentile, you only get 20% (=100-2*[90-50])* of the full benefit.
Notice that a simple back-of-the-envelope calculation says this will cut the cost of Social Security and Medicare by 25%.
My question: In the new political equilibrium, how much do you predict the full Social Security and Medicare benefit will fall? Remember, this is the benefit that everyone below the median income gets.
I doubt the full benefit would fall by more than 20%. After all, welfare and Medicaid exist right now. My long-run point prediction is actually that the full benefit will be larger than it would have been. The main cause of big transfer cuts is probably fiscal crisis – and my means-testing proposal will push any U.S. fiscal crisis far into the future.
I’m especially curious to hear non-liberarians’ predictions about the new political equilibrium. Please show your work.