Few understand that Social Security is already means-tested

First, let’s look at how benefits are calculated. What most people don’t know is that our employment tax dollars don’t all buy the same amount of future benefit. Some of our employment tax dollars buy six times as much in benefits as others.

According to the most recent Trustees Report, for instance, the first $767 of “average indexed monthly earnings” (a complex formula that adjusts earnings over time) is credited at a 90 percent rate, assuring the lowest wage workers of a retirement benefit nearly equal to their earned wage. 

Wages of more than $767 a month but less than $4,624 a month are credited at a 32 percent rate. This means retirement benefits increase at a much lower rate. The benefit pinching, however, does not end there.

 For wages of more than $4,624 a month up to the wage base maximum ($113,700 for 2013), the crediting rate is only 15 percent. Thus, all the wages earned — and employment taxes paid — over that $55,488-a-year “bend point” gain benefits at only one-sixth the rate of the lowest wage earners. 

In effect, the Social Security benefits formula functions as a sharply graduated benefits “tax,” reducing the benefits that accrue to higher wages by 85 percent. The higher your means, the lower your benefit.

 In its first year, it was expected to affect only 3 percent of all retirees. The formula for the taxation of Social Security benefits, however, is one of the few items in our miserable tax code that is not indexed to inflation. 

As a consequence, an estimated 30 percent of all retirees now pay some amount of tax on their benefits.

All of this is history. It all happened before our slippery friends in Washington started dealing with “entitlement reform.” Soon they will start talking about changing the formula for future benefits and other sneaky ways to reduce — or further “means-test” — benefits.

DYI Comments:  Now that America's birth rate is below replacement (currently 2.06) future young taxpayers needed to fund retiree's will be less available.

Additional means testing will be coming soon within the next two presidential cycles irregardless of the party in charge (or divided Congress).

DYI