Should We “Means Test” Social Security?

August 21, 2010

Listen to the first few seconds of this video of President Obama explain the social security situation.

This morning I watched a clip on Fox News (not the above clip) with a panel discussing social security and the above clip of Obama. One of the panelists, a Democratic strategist, talked about means testing social security payments so that the “wealthy” do not receive benefits.

Here is the problem with this idea:

It penalizes those who planned for retirement. There are lots of people out there who are making sacrifices in order to put money aside for retirement. People who are foregoing nice cars, fancy houses, and vacations in order to save for their future. Meanwhile, their neighbors are living the highlife and not saving nearly enough for retirement. Then, retirement day gets here and the one who put money back for retirement is going to have to give up some of their social security and the one who did nothing is going to get their full retirement. Crazy.

I think a fairer way to means test (I’m not saying I agree with means testing) is to means test on career earnings. The Social Security Administration has those earnings records. Yes, those who planned for retirement will still be penalized somewhat but not nearly to the extreme that they would be if the means test was performed on retirement assets.

The same Democratic strategist also talked about the social security trust fund. Is there even a trust fund with actual assets? It doesn’t appear so. According to the linked piece, there is an account filled with IOUs.

If only the government would have structured it as a retirement planning system. There were more than enough current workers to fund benefits for those who were currently retired. The balance could have gone into retirement accounts for the current workers. It should have never become the mess it has become. Yes, I’m angry about this because I know that my generation and my kids’ generation is going to get screwed on this deal.

This is what happens when we allow government to do for us what we should be doing for ourselves.

120 responses to Should We “Means Test” Social Security?

  1. “Wrong again. Payroll and benefits are deductible to the business, so companies do NOT pay taxes on your income.”

    Ah, thanks for correcting my mistake. My apologies. Regardless, _my_ tax rate of 37.4% is still considerably larger than uber-rich Hedge Fund managers 15% (even accounting for the non-existent taxes that the corp paid: Google “Exxon Pays No Taxes to the United States”)

    “Why is that a problem?”

    It’s a problem because the recent changes in the tax code (to favor the rich) are the primary causes for the ratios change.

    “Then do so. Show me the evidence.”


    In 2007, the latest year with IRS stats available, America’s 400 highest-earning taxpayers collected an average $344.8 million each in income. They paid 16.6 percent of that, after exploiting all the loopholes they could find, in federal income taxes.

    In 1955, the top 400 collected on average, in 2007 inflation-adjusted dollars, just $12.8 million. They paid, after exploiting all available loopholes, 51.2 percent of that in taxes.

  2. Again, you seem to have reading comprehension problems. He does not say that the STOCK MARKET is a zero-sum game, but that “trying to beat the stock market” is. In that, he is correct.

    Let us look at a hypothetical example — that a particular block of stocks, say 100 shares, are sold every ten years. Each decade, the price has gone up by some amount or another. (In general, the stock market goes up about 8% per year, not counting dividends.) So each time that block is sold, it fetches a higher price. So who is the loser?

    Let us take the contrary example. In a bear market, someone has a stock that has declined in value by 20%, but he has not sold it. Who got that 20%?

  3. Your example of taxes paid by 400 people shows only correlation, not causation. Try again.

  4. Example 1) “Let us look at a hypothetical example — that a particular block of stocks, say 100 shares, are sold every ten years. Each decade, the price has gone up by some amount or another. (In general, the stock market goes up about 8% per year, not counting dividends.) So each time that block is sold, it fetches a higher price. So who is the loser?”

    The loser(s) are the owners of the original stock who were diluted when the company issued new shares ever 10 years. The winner(s) are the company issuing new stock (inflating the supply out of nothing), and anyone who managed to sell for a profit (presumably to a loser unless they also found a matching sucker).

    Example 2) “In a bear market, someone has a stock that has declined in value by 20%, but he has not sold it. Who got that 20%?”

    The winner is the guy who sold him the stock that later declined 20%.

    As Bogle said: “For every winner, there _MUST_ be a loser.” — the simplest definition of a zero-sum game.

    Just because you can’t identify who the winner is, it doesn’t mean that you are not the loser.

    As for your comment on correlation and not causation — An increasing income matched with a lowering tax rate, compared to a flat (or falling real income) with an increasing tax rate absolutely will increase the Rich/Poor gap — plain as day.

  5. No, no, no. The SAME BLOCK OF 100 STOCKS is sold to another buyer every ten years. Now new stocks are issued. Stocks, on average, go up over time. How can this be if it is a zero-sum game?

    Go re-read the quote you posted — he is talking about winners and losers RELATIVE TO THE MARKET AVERAGE, not in the absolute sense.

    “The winner is the guy who sold him the stock that later declined 20%.”

    So someone who sells a stock that later goes up is a loser, even if he also made a profit on the stock?

    “An increasing income matched with a lowering tax rate, compared to a flat (or falling real income) with an increasing tax rate absolutely will increase the Rich/Poor gap — plain as day.”

    Perhaps, but you have not even shown that the trend changed when the tax rates changed. You gave two data points, and no examples for comparison. For instance, over the same time frame, what happened to Canada’s tax rate and rich-poor gap? To prove your point, you need to show a correlation between the change in the tax rates and the change in the rich-poor gap, and you need to show the lack of such a change in places that the rates were not changed.

    Furthermore, my opinion is that a large rich-poor gap in a capitalist society is evidence of efficient use of resources. Those responsible for the improved efficiency reap the benefits (profits). You cannot deny that the situation of the “poor” and middle class has improved tremendously since 1955. I could just as easily (and gratuitously) claim causation there as you do.

    I do not have time now, I am going to meet an old high school friend, but I will put together some data that show the wage gap vs GDP growth for industrialized nations.

  6. While I’m working on that, read this:

  7. Jack) Here is a nice write up for why the stock market is a zero-sum game:

    It’ll answer your questions more elegantly than I can.

  8. Wow — busted ’em on the first sentence:

    “…ignoring the fact that none of that stock price ever gets back into (nor out of) the company’s bottom line.”

    Quite the contrary — any dividend payed by the company are subtracted from the price of the stock on the ex dividend date:

    “the dividend payout will decrease the value of the company, as it comes directly from the company’s reserves.”

    Owners of stock are, in point of fact, owners of the company. If the company is bought out, the stockholders get the money. If the company goes bankrupt, the stockholders lose. Calling it a zero sum game is the same as saying that owning a company all to yourself is a zero sum game. If a company creates wealth, then its owners own that wealth, whether there be one owner or millions.

  9. Apparently, the writers of the article you cite have the same reading comprehension problem that you do — they cannot attach the qualifying phrase to the main clause. To whit, the first sentence of the abstract of the paper your source cites, The Winners and Losers of the Zero-Sum Game clearly says, “Trading is a zero-sum game when measured relative to underlying fundamental values.” (Emphasis mine.)

    Similarly, you ignored the qualifying phrase in “trying to beat the stock market is a zero-sum game.”

  10. Jack) Dividends are also zero sum. If a stock is trading for $10, and the company pays a $1 dividend, the exchanges automatically reprice the stock at $9 (nothing gained, nothing lost — zero sum).

    I think you need to show me an example of where the game players (stock traders) are able to walk away with more money than the losers. Show an example where the game is positive sum. I’ve already showed where Bogle goes a step further and says that it is a ‘negative-sum’ game, where the average investor actually suffers losses, and the winners are the brokers who facilitate the trades and get a cut (the “house” in a poker game).

    Your example should not require ‘new money’ from new participants — because that would be the definition of a ponzi-scheme (see Bernie Madoff). In Bernie’s version of his zero-sum game, the winners were the investors that got out early and the losers were the people at the bottom of the pyramid (ponzi scheme) who bought in last. The winner’s winnings, exactly totaled the loser’s losses (zero-sum).

    And if your example requires that a stock price goes up in perpepitude, then I’m sure there are some people in California that would love to sell you their houses.

  11. Let me be a tad more clear. If you follow a single share, through it’s entire life: beginning with an IPO, all the way through when the share is destroyed (either by the company going bankrupt, or the company buying the share back) — the winner’s winnings will exactly match the losers’ loses: EVERY TIME. No ‘wealth’ is created by the stock market: it efficiently facilitates trade to move wealth among the participants.

    But, at the end of the day, the winner’s winnings will exactly match the loser’s losses once the game is over. For me to make money in the stock market, requires that one (or more) others lose the exact same amount.

  12. “Your example should not require ‘new money’ from new participants”

    But that is exactly why the stock market is NOT a zero-sum game — because people participate, not by buying stocks, but by buying the products those companies produce. Those profits are what produce the dividends; those profits are the denominator in the P/E ratio; and those profits are the ultimate drivers of the stock prices. If a stock does not pay dividends — and many growing companies do not — the profits are plowed back into the company for more investment. This drives up the “book value” of the company by increasing its assets and obviating the company’s need to borrow working capital and investment capital, which in turn reduces its costs, because it will not be paying interest.

    You are correct in your assertion that “no wealth is created by the stock market,” but wealth is infused into the stock market by the profits of the companies on the exchange. You can think of it as the “house” in reverse. Rather than the companies’ pulling money out of the game, they put money into it.

  13. “Dividends are also zero sum.”

    No, they are paid from the income or reserve cash of the company. A company cannot pay a dividend simply by lowering its stock price accordingly.

    “Your example should not require ‘new money’ from new participants….”

    But that is exactly what happens in the stock market. The participation that adds to the market value of companies is not new money coming into the market, but money buying the products of the company.

    Let me pose to you a simple question: Does ownership of a business — perhaps an auto body shop, or a software company, or a McDonald’s franchise — confer no wealth upon its owner?

  14. “Dividends are also zero sum.”

    No — they are not paid from the stock price, but from the profits or cash reserves of the company. The stock price, which reflects the market value of the company, is necessarily reduced to keep the price to book ratio consistent over the transfer.

    “Your example should not require ‘new money’ from new participants….”

    And yet that is exactly how the market works. The participants who are adding value to the companies are not the stock owners, but those who purchase the products of the companies. To use your poker analogy, it is as though the players in the game owned the casino, and were getting a cut of the spectators’ booze revenue put into their holdings.

    You are correct that no wealth is created by the stock market, but the companies on the exchange do create wealth, and that wealth goes to their owners, who are the stockholders.

    Let me pose a simple question to you: Does the owner of a company make no money from that ownership?

  15. Sorry about the redundant posts, but nothing was sticking, so I thought something was wrong on my end.

  16. I think what is being skipped is what constitutes having ‘too much’ to receive full Social Security benefit. If, like other programs to help those less fortunate, it is based on the poverty level then almost anyone who has a house and a few thousand dollars saved will not get full Social Security. Retirees don’t usually have minor dependents or are single so the poverty level for them is very low. There would be no benefit to saving money and ‘under the mattress’ hidden from governmental scrutiny would be the best investment anyone could make.

  17. There are many on the left that tout “means testing” as a cure for what ails Social Security. To those of us with a functioning brain stem, it is clearly an expansion of “Robin Hood” economics. Punish ans steal from those who have and reward those don’t have. Plain and simple. I’ve worked all of my life and am approaching retirement, and I’ve paid a TON of money into SSI. Does any sentient being think that it is logical and right to literally STEAL this money from me, and hand it freely to those who have not contributed? At some point, folks, the SHTF, and if something this this is enacted, the feces will, in fact, contact the rotating blades.

  18. 1) The government took my money without my consent for social security and promised my returns.
    2) If the government does not give me back my retirement money, with the rate of return as promised, I will not give the government their requested tax (i.e., property tax, etc.) an equal amount to what they owe me, plus penalty.
    3) I will protact and defend my property.

  19. Flat tax will be deducted at the source of the income at say 10%. Any money left over, which would increase, could be invested by the person in any way they see fit. If they want to invest in a savings plan that is there choice. However it cannot be deducted for tax purpose as there will be no deductions on the original tax. there would be no need for an IRS since figuring 10% cannot be touched and could be figured easiely. Ther would be no tax refund due. State tax could be figured the same way nd all income would be taxed and income at a poverty level woud not be taxed. No more social security tax woud be needed.