RE: Mr. Rother: Why Shouldn't Affluent Current Retirees Be a Part of the Solution?

[John Rother <jrother@aarp.org>]

AARP believes a Social Security solvency package should recognize the varying abilities of different age and income groups to contribute.  However, we oppose denying or restricting Social Security benefits based on income.  This approach would break the long standing link between a worker's contributions and earned benefits, eroding public support for the program.

Social Security has a progressive benefit formula that blends the concepts of  "individual equity" and "social adequacy."  To preserve the concept of equity, the formula directly relates earnings to benefits by using an individual's work history and payroll tax contributions.  In order to provide adequacy, however, the formula is weighted so lower-wage workers receive a benefit which replaces a higher percentage of their pre-retirement wages than it does for average and higher earners.

While many people may not understand the complexities of Social Security's progressive benefit formula, they know that everyone who is eligible for Social Security receives a benefit based on their contributions, not their financial circumstances.  This has been one of the fundamental strengths of the program.  If Social Security benefits were conditioned upon need, AARP believes public support would drop precipitously to the levels associated with welfare programs.  If benefits were denied to high-income workers, then high earners probably would be far less willing to support and participate in the program.  Since the Social Security formula represents an implicit income transfer from higher earners to low earners, Social Security's progressive benefit structure would be unsustainable in its current form if high earners opted out of the system.  Means testing would also send the wrong message about the importance of saving, particularly to workers just starting out.  The same concern was raised by the 1994 - 1996 Social Security Advisory Council.  The Council, a blue ribbon panel convened to develop a Social Security solvency proposal failed to reach consensus on solvency, but unanimously agreed that means testing should be rejected.  They noted that the "universality of benefits is the crucial principle that allows—in fact encourages—people to add savings to their Social Security benefits and makes it feasible for employers and employees to establish supplementary pension plans."

For all of these reasons, AARP strongly opposes means testing in Social Security.  However, those with higher incomes in retirement already "give back" to Social Security due to the inclusion of some benefits in taxable income.  For those with incomes above $25,000 / year ($32,000 for couples), the income taxes paid on Social Security benefits received are recycled back into the OASDI trust fund.  This revenue flow will automatically increase in future years, as the dollar thresholds are not indexed for inflation.

Finally, we disagree with the supposed need for radical restructuring in Social Security.  In fact, only moderate changes are necessary to restore the system to full 75-year solvency, provided we act in the near future.

John Rother
AARP