James Pethokoukis

Politics and policy from inside Washington

Cutting entitlement benefits to wealthier Americans

May 12, 2011

Good stuff on means testing from Charles Blahous over at e21:

As it happens, the two largest and fastest-growing areas of federal spending, Social Security and Medicare, are both ones for which the wealthiest Americans are fully eligible for rising benefits. Both programs are, to be sure, of extreme political sensitivity. But the financial imbalances in these two programs require correction by elected officials in any event. To the extent that spending on the wealthy is constrained within these programs, it will reduce the financial pressure for even more politically-sensitive changes to them.

1) The essence of what is required is for the two parties to agree on how many high-income individuals to affect, and on how much. Social Security provides a ready case study in how this could be done. Many Democrats, for example, have expressed sympathy with the concept of raising the current $106,800 limit on the amount of wages subject to the Social Security tax. Such a measure would affect roughly 20% of workers (the number who have wages above the current limit at some point in their careers). Legislators could therefore choose instead to slow the growth of benefits – perhaps for that same number of workers, or the top 20% of the wage spectrum.

How much should the growth of such benefits be slowed? It is not financially necessary to reduce Social Security benefits from current levels. Current Social Security proposals, for example, that employ “progressive indexing” would only impose price-indexation on less than 1% of workers, with everyone else receiving faster benefit growth. Limiting the highest-income 20% to inflation-adjusted benefits and allowing gradually faster growth for workers below that level could by itself eliminate well more than half of the entire Social Security shortfall.

2) As for Medicare, Democrats and Republicans fiercely disagree on whether cost containment is best achieved via a premium support model, or by the federal government’s imposing price controls within the program’s current design. But they do agree on the need for cost containment itself. Already certain features of federal health care law, such as the exemption from the “Cadillac plan tax” and the vouchers provided under the new health entitlement, will grow only with the Consumer Price Index (CPI), despite the fact that historically health cost inflation has exceeded economy-wide CPI. If it is politically acceptable to restrict these forms of federal health care support to CPI growth, surely Medicare direct spending on the highest-income beneficiaries could similarly be limited. (This cost containment could be achieved most neatly by changing the rate of growth for income-related Part B premiums so as to hold the growth rate for total Medicare per-capita expenditures to CPI for the highest-income beneficiaries).

3) Though these are the largest federal spending programs, and though most other direct spending is not targeted on the rich by any definition, savings from direct payments to higher-income individuals need not end there. Agriculture support payments, for example, are currently made to farmers with adjusted gross farm incomes as high as $750,000 (and allowing for an additional $500,000 in non-farm income). At a time when so many continue to struggle amid a weak economy, when federal finances are in desperate condition, and when many talk of the necessity of raising taxes on millionaires, it is difficult for taxpayers to understand why direct payments to millionaires continue. It is encouraging that reports on nascent bipartisan deficit talks indicate that such excessive farm subsidies are potentially on the chopping block.

A bipartisan effort to restrain entitlement spending on the rich will not draw unanimous praise. Some on the far left will see such reforms as part of an insidious plot to weaken popular support for cherished programs. But even objection from these quarters is potentially useful and informative. As a nation we must decide whether our loyalties attach to the programs in the abstract or to the individuals affected by them both as beneficiaries and as taxpayers. We need an informed debate over whether the costs of government should rise to unprecedented levels simply because of the political importance some might attach to buying the support of those who least need assistance.


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