Distributional Effects of Means Testing Social Security: An Exploratory Analysis

53 Pages Posted: 6 Oct 2014

See all articles by Alan L. Gustman

Alan L. Gustman

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Thomas L. Steinmeier

Texas Tech University - Department of Economics and Geography

Nahid Tabatabai

Dartmouth College - Department of Economics

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Date Written: October 2014

Abstract

This paper examines the distributional implications of introducing additional means testing of Social Security benefits where proceeds are used to help balance Social Security's finances. Benefits of the top quarter of households ranked according to the relevant measure of means are reduced using a modified version of the Social Security Windfall Elimination Provision (WEP). The replacement rate in the first bracket of the benefit formula, determining the Primary Insurance Amount (PIA), would be reduced from 90 percent to 40 percent of Average Indexed Monthly Earnings (AIME). Four measures of means are considered: total wealth; an annualized measure of AIME; the wealth value of pensions; and a measure of average indexed lifetime W2 earnings. The empirical analysis is based on data from the Health and Retirement Study. These means tests would reduce total lifetime household benefits by 7 to 9 percentage points. We find that the basis for means testing Social Security makes a substantial difference as to which households have their benefits reduced, and that different means tests may have different effects on the benefits of families in similar circumstance. We also find that the measure of means used to evaluate the effects of a means test makes a considerable difference as to how one would view the effects of the means test on the distribution of benefits.

Suggested Citation

Gustman, Alan L. and Steinmeier, Thomas L. and Tabatabai, Nahid, Distributional Effects of Means Testing Social Security: An Exploratory Analysis (October 2014). NBER Working Paper No. w20546, Available at SSRN: https://ssrn.com/abstract=2505852

Alan L. Gustman (Contact Author)

Dartmouth College - Department of Economics ( email )

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Thomas L. Steinmeier

Texas Tech University - Department of Economics and Geography ( email )

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United States
806-742-2201 (Phone)

Nahid Tabatabai

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

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