Should the Rich Lose Their Social Security Benefits?

Millions of Social Security recipients get minimum-wage benefits that are barely enough to make ends meet. At the other end of the spectrum, though, many retirees who could get by just fine without any Social Security payments at all receive much larger monthly benefits from the government.

With Social Security in crisis, does it make sense to give those big payouts to the people who paid the most in taxes along the way -- or should they be forced to sacrifice those benefits for those who are less fortunate?

Before you decide whether the government should cut off rich retirees from part or all of their Social Security benefits, let's first look at exactly how high-income earners get treated under Social Security currently.

What the Wealthy Get from Social Security

Under current law, Social Security benefits get calculated based on your average income throughout your career. The more you make, the higher your benefits are, up to the yearly maximum on which the government collects Social Security taxes -- $110,100 for 2012.

But what many don't realize is that in figuring your monthly check, not all earnings are created equal.

• The first $700 to $800 in average monthly earnings counts the most, turning into $0.90 of benefits per $1 of income.

• Above that level, the increases in benefits get a lot slower -- $0.32 per $1 up to about $4,600 in 2012, and $0.15 per $1 above that.

So even though top wage-earners get more benefits, they don't get as much more in benefits as their higher earnings would suggest.

Furthermore, many high-income retirees pay taxes on as much as 85% of their Social Security benefits. For top-bracket retirees, that has the same impact as slashing almost 30% off their monthly checks.

Two Ways to Look at the Issue

Obviously, arguments for and against giving Social Security to the rich create strong emotions.

On one hand, high-income earners pay a lot of money in Social Security taxes, and with the tapered benefit structure, many feel that they already don't get their fair share of what they put into the Social Security system. If Social Security calculated benefits without the earnings breakpoints described above, then high-income earners would get much more in their monthly retirement checks.

On the other side of the argument, many believe that the purpose of Social Security isn't to give people payback for the payroll taxes they've had withheld from their paychecks throughout their lifetimes, but rather to provide an economic safety net for all workers. With insurance for disabilities and other hardships as well as retirement benefits, Social Security acts as a supplement for those who need it. Proponents of measures like means-testing argue that if you don't actually need the money, you shouldn't get benefits.

Does Rolling Back Benefits for the Rich Really Help?

The bigger question, though, is whether cutting benefits for the rich would actually do any good.

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A 2011 study from the progressive Center for Economic and Policy Research concluded that phasing out benefits as income levels rose would have little or no effect on Social Security's viability going forward, especially when you consider the ways that the rich would respond to the move.

Right now, 90% of benefits go to individuals with less than $50,000 in annual income (not including what they get in Social Security). In order to have a marked impact on Social Security's financial health, a means test would have to hit far more than just the very rich. More importantly, the added costs of administering a means test would offset any savings.

Still, the practical impact of means-testing doesn't change the way many people feel about the fairness of the program. As long as Social Security remains in financial trouble, reformers will look at cutting back on benefits for the rich as a possible solution to a much bigger problem.

Motley Fool contributor Dan Caplinger doesn't count on Social Security for anything. You can follow him on Twitter here.