Hedge fund billionaire Stanley Druckenmiller was on Charlie Rose recently (*). He spoke quite a bit about the U.S. government and various economic and policy topics with a strong emphasis on inter-generational equity: He thinks our social welfare (“entitlement”) system is unfair to the youth of today by unsustainably transferring too many resources to older citizens. Most of what he said very closely aligns with my own thinking… until he got to means testing in “fixing” social security.
He calls means testing both Medicare and social security “the low hanging fruit” (31:35 rem.; **). He admits that in the scheme of things it’s “not a whole lot of money”, but he wants to do it. Indeed, he would not even exempt people over the age of 55 from cuts even though they are within spitting distance of retirement.
From his stratospheric perch (geosynchronous orbit?) he sees social security as simply an insurance policy analogous to fire insurance – a protection against financial catastrophe. If your house doesn’t burn down, you don’t collect. The funny thing is, that’s a bad analogy for his point: Fire insurance policies usually make you whole – if half of your house burns down you don’t scurry to live in the remaining rooms; no, you collect in order to maintain the standard of living you earned.
Yet that’s what means testing is: His notion is that social security is there to ensure you’re living at a very basic survival level (unless you achieve escape velocity to reach his kind of orbit) rather than insure you against abject poverty. My notion is that everyone who makes a good go at it (***) receives sufficient benefits to maintain dignity and be able to enjoy basic comforts during retirement. If you’ve managed to save and invest instead of consuming everything you could while younger, you should be able to enjoy the fruits of your thrift during retirement (****). If you don’t have much saved but want to work part-time during retirement in order to enjoy life, we shouldn’t take that away. Means testing directly penalizes saving and investing as well as earning during retirement.
Also, it is very difficult to properly measure an older person’s situation. Current income is only a part of the picture. Do they have access to other family members’ assets – vacation homes, casual assistance, etc.? Seniors with the ability to shift assets and hide value streams will have a huge advantage over those without extended networks and the sophistication needed to manipulate the system.
I found this brief means testing “Pro & Con” from AARP (pdf) and was surprised to find the Heritage Foundation in the “Pro” corner.
When the Heritage Foundation and billionaires embrace the principle of “to each according to his needs” your radar should trip. They haven’t suddenly embraced some new notion of fairness. What they know is simple: Modest tax increases would be needed to avoid means testing or other benefit cuts. The very highest earners and the wealthiest households would end up paying a big chunk of those extra taxes. Mr. Druckenmiller finds himself largely at odds with his former mentor and partner, George Soros, but when they get together to discuss their perspectives in the coming months somehow I think they’ll both be comfortable with means testing.
You might be thinking that means testing would only apply to those with very large retirement incomes. Pick a number. Over $200,000? Not even close. There just aren’t enough people with those really high retirement incomes to make a difference. You need to go lower. A lot lower. Like to the level where people receive a large marginal benefit from social security.
I don’t often favorably reference the analysis at CEPR, but this is pretty good even if a bit back-of-the envelope. I’m sure more careful analysis would change the numbers a bit, but it’s worth copying the closing paragraph:
Of course you could start the phase out a higher income level (like $50,000 per person) and have it at a more reasonable rate (e.g. 10-20 percent), but then you find that you don’t save the program much money. In our paper we found that the savings, net of tax, for a 20 percent phase out starting at person incomes of $40,000 would save around 3 percent of benefits. If it was started at a person income of $100k it would save around 0.6 percent of benefits. These numbers give a much more realistic idea of how much can be saved with means-testing. See how much fun math can be?
Means testing isn’t about Bill Gates. It’s about the middle class. It particularly targets middle class workers who had to save for their own retirements rather than relying on access to family and close community asset networks.
Our government employees’ pensions further emphasize the unfairness of means testing. Guess what? No means testing there. There is no notion that those with large government pensions should see their checks shrink to take care of poor elderly people. Shortfalls will be made up in two ways: The preferred way – taxpayers pay more taxes. Otherwise new government workers make larger pension contributions and/or see lower future benefits. See how that works? Private workers (ordinary citizens) with modest retirement incomes should lose their benefits, but government pensions are sacrosanct regardless of amount. It’s no wonder the vast majority of government workers have successfully lobbied to be exempted from social security participation. They know they’ve got a very fine deal. They can “serve the public” out the front door, but slip out the back door with retirements secured by taxpayers and protected against the pesky grasping hands of “those people”. A real travesty and a real hypocrisy. (*****)
Say No To Means Testing Social Security Benefits!
* He admits the whole government, demographics, social policy and budgeting thing is kind of new to him, but hey, he’s Rich Guy, so people will listen. Because, um, you know, being a wizard trader and market strategist in a zero sum high-information game prepares you well to understand policy and long-term macroeconomic dynamics.
** That means reducing or eliminating benefits for people with decent income during retirement.
*** Even if you don’t contribute, your fellow citizens should keep you out of the gutter.
**** If you think that too many people didn’t properly earn the assets that they take into retirement, then there are much better ways to address those instances. Perhaps taxing the incomes of the Stanley Druckenmillers of the world like, well, income instead of capital gains would be a start. Separately, if you object by saying that some people simply don’t earn enough to save for retirement, be clear about what you mean: If you think those who did earn enough to save should lose benefits during retirement because others couldn’t save then your philosophically advocating a retroactive tax on lifetime income without consent.
***** I’m not “against” government workers. I don’t think they’re all a bunch of bums. In fact, I’m generally pro-pension (defined benefit) vs. defined contribution, but that’s another post.