Consequences of Means Testing Social Security: Evidence from the SSI Program

We attempt to draw inferences about the potential behavioral responses to means testing Social Security by examining the effects of the Supplementary Security Income (SSI) program for the aged on wealth accumulation and employment. Part of the SSI program provides payments to the poor elderly, thus operating as a means-tested public retirement program. The federal government sets eligibility criteria and benefit levels for the federal component of the program, but many states supplement federal SSI benefits substantially.

We exploit the state-level variation in SSI benefits to estimate the effects of SSI on saving and labor supply. We use data from waves 4, 5, and 7 of the Survey of Income Program Participation (SIPP), covering individuals in the 1983-1986 period. We find evidence that high SSI benefits reduce saving among households with male heads who are approaching the age of eligibility for SSI for the aged, and who are likely participants in the program. But we find little consistent evidence that generous SSI benefits reduce the labor supply of older men nearing the age of eligibility. This evidence suggests that a means-tested Social Security program that bases eligibility or payment levels in part on accumulated wealth may, consistent with the fears of critics of such a program, discourage saving among those approaching the age of retirement.