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6 Reasons Joseph Stiglitz and Other Top Economists Think Means-Testing Medicare & Social Security Is a Destructive Idea

Means-testing is a back-door strategy for taking away benefits earned by hard-working Americans.
 
 
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In Washington-speak, “means-testing” is a scheme to deny or reduce Medicare and Social Security benefits for people who are “too wealthy” in the name of saving money. It’s a counterproductive, harmful idea, but one that well-intentioned liberals often end up embracing.

It’s easy to see why. Economic inequality has exploded to dangerous levels, and the argument for means-testing seems to appeal to a powerful sense that the rich are getting more than their fair share at the expense of everyone else. Combine this with the deficit hysteria promoted by conservatives, and the trap is set.

Don’t fall into it. The truth is that means-testing is a sneak attack on vital programs meant to weaken and eventually destroy them. There’s a reason why an ultra-conservative like Paul Ryan pushed means-testing during the presidential campaign. And there’s a reason why private equity billionaire Pete Peterson, enemy of Social Security and Medicare who served in Richard Nixon's cabinet, makes a special point of bringing up means-testing when he is talking to liberals.

Conservatives push means-testing because it’s a highly effective political strategy for getting liberals and progressives to act against their own values and interests -- so effective that some economists billing themselves as liberal, such as Jared Bernstein, a former adviser to the Obama administration, sometimes promote means-testing as a reasonable idea. Bernstein recently went on CNBC and said that means-testing “sounded like a good idea” and characterized people opposed to it as “fringe.”

Bernstein’s assertion that means-testing opponents are “fringe” is nonsense. Does that include Paul Krugman of the New York Times, who describes means-testing as "an even worse idea, on pure policy grounds, than even most liberals realize"? In researching this article, I communicated with several highly respected economists, including Nobel Prize-winner Joseph Stiglitz, James K. Galbraith, Dean Baker, and Thomas Ferguson. All of them expressed their concerns about means-testing and provided a variety of sound arguments against it. (Bernstein, after being roundly criticized, backtracked in a blog and admitted that means-testing is a bad policy idea and a questionable way to address income inequality. He just forgot that when he was on TV!)

Here are six reasons why you should be on high alert any time you hear the phrase "means-testing" -- whether it comes from government-hating conservatives or liberals who wish to appear “moderate.” The truth is that there is nothing moderate or reasonable about means-testing – or any other plan to weaken Social Security and Medicare.

1. Means-Testing Undermines Progressive Values

At their heart, programs like Medicare and Social Security are about fairness, equality and shared citizenship, values that progressive Americans hold dear.

Medicare and Social Security are not welfare programs. They are benefits that people pay for as they work. They are also smart social insurance programs that spread risk across society in order to protect everyone at rates no private insurance scheme, with its much smaller risk pool, could touch.

When I spoke to Joseph Stiglitz, he discussed the idea that “means-testing is mean.” Programs like Medicare and Social Security, he explained, are matters of political economy. They are important to social cohesion, where support comes from the fact that everybody is participating. “We don’t means-test public education,” explained Stiglitz, “because we believe that we want people to have the same opportunities and we lose out on that with means-testing.” The same is true of our belief that everyone deserves a dignified retirement and adequate medical care in old age.

Medicare and Social Security are not handouts to the needy. They are not even intended to be a safety net. In their design, they promote the fundamental notion that dignity and good health in old age are not special privileges that can be bestowed or taken away. They are fundamental rights that every working American who has contributed productively to the economy can expect to enjoy. As James K. Galbraith told me in an email, “It’s insurance, not charity.”

Means-testing runs against this fundamental idea by turning Medicare and Social Security into welfare programs that become bargaining chips for politicians. The programs become provisional rather than fundamental. President Franklin Roosevelt understood this point well, which is why he designed Social Security to be attached to a payroll tax so that “no damn politician can ever scrap my social security program.”

Conservatives have dedicated themselves to making Americans feel as though benefits they have earned are undeserved. Consider Mitt Romney’s infamous comments at a 2012 fundraiser:

“There are 47 percent of the people…who are…dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to healthcare, to food, to housing, to you-name-it -- that that's an entitlement. And the government should give it to them.”

By turning Medicare and Social Security into welfare, means-testing feeds right into the Romney view of the world, an us-against-them mentality that pits the self-righteous wealthy against ordinary people. Means-testing would divide the population and further emphasize the difference between the haves and the have-nots by transferring a sense of receiving handouts to those getting Social Security and Medicare. 

Alicia Munnel, director of the Center for Retirement Research at Boston College, has explained that programs like Social Security represent "the payoff of a lifetime of premiums." Contrary to what Romney would have you believe, she points out that "the government writes the check, but in most cases individuals have paid for the benefits."

Today, when Grandma goes to the mailbox to find her Social Security check, she can be proud that the millionaire on the next block receives his check, too. They are bound together as Americans, as fellow citizens who have a stake in the economy and in a society that functions well for everyone.

As Dean Baker explained in an email, “People paid for these benefits. It's true that a few people like Peter Peterson may not need them, but these people probably also don't need the interest they get on government bonds. No one talks about means-testing that, or to take another example, federal flood insurance.”

2. Means-Testing Won’t Stop at the Wealthy

Make no mistake: If means-testing on the wealthy is allowed, conservatives will keep pushing until that same means-testing is applied to the middle class, who increasingly must rely on Social Security and Medicare in times of economic uncertainty and job insecurity.

Don’t think so? Think back to 1983, when the Greenspan Commission backed by Ronald Reagan made changes to Social Security, including raising the retirement age to 67 for people born after 1960. “We’ll never do it again!” they said. “Just this once!” The full increase in the retirement age has not yet affected retirees -- that dicey experiment is waiting for those under 52 – and so we don’t even know yet how hard the hit will be.

But those same people who said “never again” are asking to raise the retirement age today. So when you hear politicians and pundits talk about means-testing with promises of “We’ll only do means testing on the very rich,” or “Just this once,” remember how empty such promises tend to be.

As Jared Bernstein himself noted in 2011, “the history of social policy leads me to worry [that] once you shift a program from universal coverage to means testing, it’s increasingly vulnerable to deeper means-testing until it eventually becomes a poverty program which everyone wants to get rid of.” Exactly.

Economist Dean Baker further notes that you don't save any money on programs like Social Security and Medicare unless you hit very modest income people. “There just are not very many wealthy elderly,” wrote Baker in an email. “While you can get a lot of money from taxing the rich, Peter Peterson's Social Security check won't be that much bigger than mine and his Medicare benefits won't be any bigger. To get any money you will have to be hitting people with incomes around $60k. These are people we would not ordinarily think of as rich.”

As political economist Thomas Ferguson told me: “The truth is that means-testing is a device to destroy political support for what are still the most popular of all government programs – programs that have survived decades of attacks by the right.”

3. Means-Testing Doesn’t Make Economic Sense

Proponents of means-testing will tell you it’s a great way to save money. But that’s not really true. In fact, it will likely raise costs for middle- and lower-income seniors who rely on Medicare and Social Security to live decently in retirement. 

Means-testing will cause many high-income beneficiaries to view the programs as unfair, and they will opt out, purchasing their own insurance and retirement policies on the private market. Programs like Medicare and Social Security depend on spreading risk across a large pool of people. For example, the departure of higher-income beneficiaries from Medicare, who tend to be younger and healthier, would increase overall costs and diminish public support.

Means-testing impacts costs in several other ways. For one thing, it would turn Medicare and Social Security into what economist James K. Galbraith referred to in an email as “an administrative horror show” that will make the programs more expensive to run.

It’s interesting how conservatives constantly argue that raising tax rates distorts the economy and produces disincentives to work. Joseph Stiglitz pointed out to me that means-testing has just the effect conservatives say they are against: “The phase-out is an effective increase in the marginal tax rate. So if your income goes up and you lose benefits, that’s a disincentive for working. Every means-testing has that adverse effect.” Dean Baker further pointed out that very high effective marginal tax rates give people enormous incentives to game the system.

But what can we do about rising healthcare costs? In his blog, Jared Bernstein cites growing healthcare costs as a reason for means-testing. Healthcare costs are certainly growing, but not because of the benefits received by the elderly. They are growing because of monopolistic conditions in the insurance industry, insanely high prices for drugs charged by pharmaceutical companies, and a fee-for-service system that encourages doctors to charge for expensive and unnecessary services. If you want to deal with rising healthcare costs, you deal with those issues.

People who want to means-test Social Security come up with all sorts of baloney to convince you that the program is in crisis when it isn’t. In fact, it is solvent, prudently managed, cost-effective, and carefully monitored. Social Security is indisputably America’s most successful program to date, which is why people love it. A 2011 poll shows that despite all the political posturing and fabrications, most Americans still have not bought the lie that the program is in crisis. In fact, most of them would like to see benefits increased!

4. Means-Testing Plays into Conservative Deficit Hysteria

Conservatives promote deficit hysteria because they have a fundamental hatred of government and wish to destroy the New Deal programs that have benefitted the middle class and the poor. If they were really concerned about deficits and spending, they would not support costly and unnecessary wars, monopolistic conditions, and extremely low taxes for the wealthy and large corporations.

By falsely asserting that the benefits of Medicare and Social Security are major drivers of the deficit, conservatives try to divert attention from the wasteful things that actually drive deficits.

Social Security does not contribute to the deficit. It is a well-managed program in fine fiscal condition, and there is no justification for tampering with it now. The Trustees Report shows that the program will be able to meet all of its obligations at least until 2033. If there is a tweak needed down the road, that can be handled very simply by raising the cap, which stands now at just over $100,000. If you are truly concerned about income inequality, raising the cap is a much better way to address it than means-testing.

5. Creeping Means-Testing Is Already Happening

Medicare already has some means-tested features and politicians have gradually added more, including income-tested premiums. Medicare was started in 1965 to provide health insurance to people 65 and older regardless of their medical history or income. Since then, 75 percent of the program’s Supplementary Medical Insurance (SMI), the part that goes to pay doctors, has been financed by general revenues, the largest chunk of which comes from personal income taxes. The personal income tax is progressive, which means that upper-income people pay a larger share of their income in taxes for SMI.

Since 2007, specific means-testing features have been added. For example, beneficiaries with incomes over $85,000 have been required to pay higher SMI premiums. Beginning in 2013, the 2.9 percent hospital insurance tax will continue to apply to the first $200,000 of income for individuals or $250,000 for couples filing jointly, but it will rise to 3.9 percent on income in excess of those amounts.

Means-testing tends to erode political support for programs, which is why conservatives will continue to push these incremental changes. We’ve gone far enough in this direction already and there is no good reason to continue – other than giving greedy one percenters and financiers exactly what they want.

6. The Coming Old Age Crisis

How exactly are you going to survive in retirement? Do you have a pension? Do you have a secure job? Is the stock market paying great returns on your investments?

In her book, When I'm Sixty-Four: The Plot against Pensions and the Plan to Save Them,economist Teresa Ghilarducci has sounded an alarm about the crisis looming for Baby Boomers and anyone else who hopes to retire down the road.

The United States is a rich country, and a dignified retirement for our elderly should be one of our proudest achievements. And yet Social Security and Medicare are under near-constant attack. Pensions are vanishing, and despite 401(k)s and other voluntary retirement plans, workers still can’t save nearly enough to retire securely. Ghilarducci warns that the economic structure of retirement in America is falling apart. She exposes the Wall Street financiers who want to privatize Social Security, the risk of 401(k) plans, do-it-yourself retirement schemes, and companies like Enron that have left employees high and dry.

The financial stability of Americans is further shaken by rising medical costs. A single-payer system would be the most sensible way to address this crisis, and Medicare is the closest thing we have now to single-payer. Means-testing would harm seniors who already have paltry incomes. Proposals to increase premiums for 25 percent of beneficiaries, for example, could hit American seniors who make as little as $47,000, according to the nonpartisan Kaiser Family Foundation.

Congress can do many things to help the economy recover from a Wall Street-driven financial disaster and to address income inequality, like asking the one percent to pay their fair share in taxes. But we must come together as Americans to expose the subterfuges and lies and reject any proposals that harm Social Security and Medicare, including means-testing.

Lynn Parramore is Contributing Editor at AlterNet. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of "Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture." She received her Ph.D. in English and cultural theory from NYU. Follow her on Twitter @LynnParramore.