‘Means testing’ to bolster Social Security? It’s already happening.

March 1, 2012

It’s almost time for one of Washington’s rites of spring: the arrival of the new Social Security trustees’ report. The report, which is usually issued in April, will show Social Security’s finances deteriorating because of a higher-than-projected inflation adjustment for 2012. This is likely to touch off a debate over whether to help fix Social Security’s financial problems by denying retirement benefits to “the rich.” On the surface, this approach, known as “means testing,” sounds great. Eliminating payments to retirees with incomes above a certain level would make more available to folks in need. Those greedy rich need to pay their fair share, right?

But here’s a dirty little secret: Social Security is already seriously means-tested. And my situation shows it.

My wife and I began drawing benefits in November even though I’m still working full time at Fortune — we qualify for full benefits because I’m 67. We have a relatively high income but aren’t close to being in the top 1 percent. After we finish paying two separate federal taxes that will be credited to the Social Security trust fund, our net benefit will be only about a third of what we and our employers have paid into Social Security over more than 50 years. That strikes me as some pretty serious means-testing. And keeping the current system with its uncontroversial means-testing is a lot less divisive than trying to eliminate benefits for “the rich,” however you define them.

Now, let me show you the numbers for my wife and me. Our benefits are worth only 75 percent of what we and our employers have put into Social Security since I drew my first paycheck in 1961, plus the interest earned on that money. I know this because in 2009, I asked Social Security’s actuaries to calculate that ratio to help me write a Social Security story.

I have no problem with that 25 percent haircut, which stems from Social Security benefits being progressive — as they should be. For low-income people, Social Security replaces up to 90 percent of covered wages. For the likes of me, who earned the maximum Social Security wage for 35 years, the rate is only 28 percent.

So we start with 75 percent of what we paid. Because I have other retirement income, my wife and I will pay tax on 85 percent of our Social Security. That tax is at a 35 percent rate — because of the alternative minimum tax, not because I’m in the top bracket — so we’re paying the IRS almost 30 percent of our benefit. It goes to the Social Security trust fund.

In addition, I pay Social Security tax because I’m still employed. Fortune and I will pay a total of $11,450 this year, about 25 percent of my benefit. This, too, goes into the Social Security trust fund, and will increase my benefits only slightly. (I’m assuming, as analysts do, that the employer’s piece of Social Security is in effect paid by employees.)

Add it all up, and the net benefit that my wife and I get is only about 35 percent of the value we paid in. Even if I retired and stopped paying Social Security tax, we’d get only slightly more than half of what we put in.

I think that’s perfectly okay — Social Security is a safety net, not an investment program. I’ve been fortunate, and I’m happy to help the less fortunate. But only to a point.

Ask me to sacrifice a bit more to safeguard the safety net, and I’m fine. Trim my inflation adjustment, tinker with the benefit formula, be my guest. But don’t strip me of my benefits, for which I’ve paid 50 years of taxes, just because I’ve worked hard, saved and succeeded financially. That would make me furious. Plenty of other people in circumstances similar to mine would be angry, too. Eliminating checks for people with incomes that make them “rich” transforms Social Security from an “everyone pays, every­one collects” earned-benefit program into welfare. And we know what happens to welfare programs in the United States. (Slash!)

The bottom line: Social Security is already seriously means-tested, without having made a point of it. Let’s fix Social Security’s real problems, not this imaginary one.

Sloan is Fortune magazine’s senior editor at large. To read his previous columns, go to postbusiness.com.

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