Distributional Effects of Means Testing Social Security: An Exploratory Analysis

TitleDistributional Effects of Means Testing Social Security: An Exploratory Analysis
Publication TypeReport
Year of Publication2016
AuthorsGustman, AL, Steinmeier, TL, Tabatabai, N
Series TitleNBER Working Paper Series
Document NumberWorking Paper No. 22424
InstitutionCambridge, MA, National Bureau of Economic Research
KeywordsNet Worth and Assets, Public Policy, Social Security

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.

Endnote Keywords

social Security/Public Policy/means testing/wealth/pension wealth

Endnote ID


Citation Key5847