Obama in SOTU – Means Test SS?

Next week we get the State of the Union address. The question, “Is there anything that might come from the speech that will impact the markets? The economy? Maybe. One area that I think we may get a recommendation from the President is a means tax on Social Security benefits. That is a pretty bold call by me. Should the President propose this (and it is enacted) it does have significant implications. I have no line into the President’s thinking. I come to this conclusion looking at a few odds and ends.

-A friend attended an Ed Hyman ISI confab recently. He showed me a copy of the slides used in the presentation. This stuff is private so I won’t use Mr. Hyman’s graphs. But the handwritten notes from my friend are interesting:

Notice the comments about SS and means testing. Let’s just say that Ed is part of the inner circle. (The Obama/Bernanke thoughts are also interesting)

-Christine Romer did an Op Ed for the NYT on January 15. Her words:

The Deficit Commission proposed thoughtful ways to slow the growth of Social Security.

One of those “thoughtful” ideas was a MT.

The President should ensure that spending cuts not fall on the disadvantaged.

A MT would do that.

The only realistic way to close the gap is by raising revenue. Some of it can and should come from higher taxes on the rich.

A MT would do that too. Ms. Romer is ex Administration. I think she is still talking their book.

– Where would the opposition come from? Republicans? On Jan. 5 influential Republican Governor, Mitch Daniels (Ind.) commented:

I always say, “Why do we send a pension check to Warren Buffett?”…

It comes down to the House on this. So where is Speaker John Boehner on MT?

Big changes are needed for Social Security, including reducing or ending benefits for retirees with “substantial” other income.

We shall see if all this apparent support stands. I don’t really believe in love fests in D.C.

Speaking of love fests don’t assume that this would be a slam dunk. There are many who believe that SS is sacrosanct. Sen. Harry Reid had this to say on Meet the Press last week. Surprised?

MR. GREGORY: Means testing? Raising the retirement age?

SEN. REID: …don’t–I’m…

MR. GREGORY: Do you agree with either of those?

SEN. REID: I’m not going to go to any of those back-door methods to whack Social Security recipients. I’m not going to do that.

Politics does make for some very odd bedfellows….

-Zero Hedge had an article a month ago regarding a comment by political blogger Robert Kutter. From the POLITICO.

The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

Robert craps on the idea of cuts in SS as it would hurt Obama’s base. Not the case at all. A means test hits rich old people. That’s not O’s base. It’s a very small percent of the population. Make what you will of this.

-A SS means test is a legitimate option. I wrote about it back in July. Many others have as well. It will “sell” to a broad spectrum of the population. “Tax the rich” always sounds good. The President will have at his side Bill Gates and Warren Buffet (both getting SS checks). They will say that it’s the “right thing to do”. (they already have)

I am looking forward to see how this shakes out. Possible results?

Shrink the size of government? (Yup). Reduce the rate of growth of expenditures? (What last November was about) Stabilize SS without cutting benefits for most people? (Hard to say no.) A means test could allow for a permanent cut is SS taxes (ala 2011). (Who could say no to that!)

This is a very big step toward socialism. It would also be the first of many steps of unwinding SS. A means tax would undermine long-term support for the program. (Note: this issue could be blunted by giving Gates and Buffett a tax credit on federal estate taxes for what they lose in benefits).

Say this should happen. How do the markets react? Initially, it might be perceived as a positive. If the headline were: US Gets Serious on Debt Reduction then we might see some risk on
trades happening.

But the devil is very much in the details. It is possible this will be one of those things where the deal is: Starting in six years and increasing gradually over the next ten thereafter blah blah blah. (Kick the can down the road) Should that be the case I (and many others) will rain all over it. That outcome would bring a different set of risk on/off results.

IMHO a means tax could be done with near immediate results. It could translate into a permanent reduction of some employment taxes and it would/could help SSA get through the next 15 years (boomers) without forcing a run off of the Intergovernmental account (less debt to public). Something that had both teeth and near term consequence could possibly change sentiment. Who knows?

Nothing addresses all of America’s problems. A means test is an option that should be considered. Depending on how it is done, it could make a difference. I think it will come on the table next week.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

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2 Comments on Obama in SOTU – Means Test SS?

  1. The way you “means test” Social Security is to tax it as ordinary income on folks whose AGI is over a certain level. This is what is being done now. That is how you “means test” Social Security. Taxed as ordinary income is way higher than capital gains are taxed now, even for those in high incomes. Forget trying to NOT give SS to those over a certain income. Continue to tax the SS income as ordinary income.
    For Medicare, the amount you pay for Part B is dependent on what your AGI was the previous year. That is also the way to “means test” Medicare. What we need is more federal revenue. Seniors/retirees with incomes over certain levels need to pay their “fair share” into federal revenue. That is reasonable.

  2. George: so what you are saying is that even though I have paid into social security all through my working life there is a good chance that if I am too successful I will not get back what I put into the system?

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