Means Testing and Social Security in the U.S

This paper uses a heterogeneous-agent overlapping-generations model to examine the fiscal and distributional consequences of introducing a means test in U.S. Social Security. I find that a means test, i.e. conditioning benefit payments on a household’s earnings and/or assets, leads to a higher implicit tax on old-age resources, but has desirable distributional effects. A 75% cut in the benefits to households with earnings more than 200% of the median leads to a 2.3% reduction in the overall size of Social Security, but has almost no effect on the average benefit level. A fiscally comparable payroll tax cut, on the other hand, leads to an across-the-board decline of 2% decline in the benefits. Finally, an asset-based means test causes a decline of 1% in average benefits, but has a large negative effect on the accidental bequests left behind by deceased households.