Mitch Daniels' SOTU Response Wrong on Social Security

In the GOP response to President Obama’s state of the union address, Indiana Governor Mitch Daniels argued that Social Security should be means-tested, rather than asking the rich to pay their fair share of taxes to the program. While this proposal may sound innocuous, in fact, means testing would save Social Security little money, erode its fundamental character, and cost it political support.

Daniels claims that while Social Security and Medicare have “served us well” over the course of their many decades of existence, they are in need of “some repairs.” In the following sentence, however, Daniels explains that “some repairs” mean “we must fashion a new, affordable safety net”—i.e., fundamentally transform Social Security and Medicare.

Daniels makes clear that the main “repair” he has in mind is means testing. Daniels repeats a variation of the “Warren Buffet does not need a Social Security check” cliché, making means testing seem like little more than common sense:

Decades ago, for instance, we could afford to send millionaires pension checks and pay medical bills for even the wealthiest among us. Now, we can't, so the dollars we have should be devoted to those who need them most.

The pronouncement that we can no longer afford to provide Social Security and Medicare benefits to millionaires, appears on its face, to be a relatively minor, fair-minded change.

This is also not the first time Daniels has made this claim. Just last year, in an interview with David Leonhardt [1] of the New York Times, Daniels said, "I always say, 'Why do we send a pension check to Warren Buffett?'…" At the time I critiqued him for spreading the "myth of Social Security cuts that only affect the rich." [2]

There is a clever logic to Daniels’ seemingly contradictory characterization of means testing as both the product of “repairs” and a feature of an entirely “new, affordable safety net.” Means testing is often perceived to be a minor, harmless change, a perception Daniels wishes to encourage. Hence, “repairs.” But, in fact, it would render Social Security in its current form unrecognizable. Hence, a “new, affordable safety net.”

Means testing has such common-sense appeal that it has even gained traction among some Democrats. That is why it is especially important that we elaborate on why, for Social Security in particular, it would cost more than it saves.

Daniels characterizes opponents of benefit cuts as the “mortal enemies” of Social Security and Medicare, who are “in contempt of the plain arithmetic.” In fact, his vision of means testing only applying to millionaires is “in contempt of the plain arithmetic,” or more likely, a cynical attempt to gloss over the true costs of means testing.

In fact, as the Strengthen Social Security Campaign shows in its analysis, “Means Testing Betrays the Universal Promise of Social Security,” [3] means testing millionaires alone would not save Social Security nearly enough money. Just 2 percent of Social Security benefits go to people with non-Social Security income of $100,000 or more, according to the Center for Economic Policy and Research [4]. (See the Strengthen Social Security Campaign’s chart of the earnings levels of Social Security beneficiaries below.) To gain significant savings for the program, the benefits of middle-class earners would have to be dramatically scaled back. Daniels and his fellow proponents of means testing probably realize this, but would like to soften the blow of more extreme means testing in the eyes of the public.

For its part, Medicare already contains many means testing features, as Paul N. Van de Water of the Center on Budget and Policy Priorities [5] has noted.

Even if means testing millionaires alone were financially viable, it would violate the program’s fundamental character as an insurance program transforming it into more of a welfare-style program. Currently, Social Security is an insurance program that protects Americans against the loss of income due to old-age, disability or death, in which contributing policyholders are entitled to benefits irrespective of their wealth. Just as we do not means-test fire insurance, so too we should not means test Social Security.

This would, in turn, undermine political support for Social Security. Social Security has remained popular across party lines for its 76 years of existence, despite rising skepticism of government, precisely because of the program’s essential fairness. Everyone contributes to the program during their working years, earning them benefits based on their contributions later on in life.

By contrast, consider how the public views means-tested welfare programs like food stamps and Medicaid. It is no coincidence that politicians have used these programs to demonize "welfare queens," while cutting Social Security remains something of a "third rail" in American politics.

Daniels’ proposal even violates his own Party’s principles of hard work, achievement and thrift. In its present form, Social Security provides bigger benefits to workers who earn and contribute more. But by eroding the link between earnings and benefits, means testing Social Security would create perverse incentives. As the Strengthen Social Security Campaign’s analysis [3] notes, “If someone has too much in income and assets they would risk losing some or all of their Social Security benefits. Government policy should encourage accumulation of a nest egg, not discourage it.”

In addition, Daniel’s means testing proposal contradicts his Party’s commitment to small government. Means testing would force the government to pry into personal financial records, while increasing Social Security’s low administrative costs several times over. The Strengthen Social Security Campaign writes:

Currently, Social Security’s administrative expenses are less than 1% of total benefits paid. They are low because in order to qualify, all that a person needs to do is provide a Social Security number and birth date. These costs would likely double if the program were means tested, since potential beneficiaries would likely have to produce bank account statements, value of assets (such as houses and cars), tax returns, gifts to children, etc., to show that they are below the government-approved level to receive benefits.

Contrary to Daniels’ claims, there are many ways to make the rich contribute more that do not undermine Social Security the way means testing does. One such way is scrapping the cap [6] on taxable payroll, so that millionaires contributed payroll taxes on all of their earnings, rather than just on the first $110,100 they earn. If this was enacted, and the new earnings were not counted toward benefits, Social Security’s entire funding gap would be closed.