Should affluent seniors pay more for Medicare than everyone else? How about Social Security? Should we cut benefits for wealthy Americans?

Ideas for “means testing” these critical retirement programs are front and center as deficit reduction talks move back into high gear in Washington. Many Republicans are arguing that Social Security benefits should be cut for wealthy Americans — an idea also backed by the bi-partisan Simpson-Bowles deficit report. Meanwhile, President Obama proposed higher Medicare premiums for high-income seniors this week as part of the deficit plan he submitted to the Congressional Super Committee.

But what does means testing really mean, and what does it mean to seniors on Social Security and Medicare? In this post, let’s consider means testing for Medicare; a follow-up post on implications for Social Security can be found here.

Traditionally, “means testing” has meant measuring financial adequacy to determine eligibility for welfare – that is, it tests for inadequacy, not abundance. Politicians tossing around the term now really mean reducing benefits or jacking up contributions for rich people. That may sound like a minor distinction, but it’s important if you consider that Social Security and Medicare aren’t welfare programs, but entitlements available to seniors up and down society’s spectrum of wealth.

Lacking the stigmatization welfare carries, both programs enjoy such broad public support. A survey released today shows that voters oppose cutting Social Security and Medicare to reduce the deficit by a 50 point margin, and that opposition to cuts is strong across party lines. The poll was sponsored by National Committee to Preserve Social Security & Medicare, an advocacy group — but conducted by a bi-partisan team of Democratic and Republican pollsters.

Medicare already features significant means testing for the wealthy. In fact, President Obama’s new proposal would only expand higher premiums for wealthy seniors first enacted under the Medicare Modernization Act of 2003. That law established higher Medicare Part B (doctor visits and outpatient services) premiums for individuals with $85,000 or more in annual income, and joint filers with income over $170,000.

Can we afford retirement in this country? Not if you believe politicians who claim entitlement spending is out of control and that the economy is being dragged down by our aging population.

I don’t buy it. Soaring healthcare spending is a critical problem, but not only because our population is aging. And Social Security is affordable as a percent of GDP — it’s equal to 4.7 percent of GDP this year, and will slowly rise to 5.3 percent by 2021, according to the Congressional Budget Office.

Now comes an important new book that debunks another retirement myth: Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers (Portfolio/Penguin). Written by Ellen E. Schultz, an award-winning investigative reporter for The Wall Street Journal, the book takes on the often-heard claim that private employers no longer can afford to provide traditional defined benefit pensions.

Schultz’s thesis is that the near disappearance of defined benefit pension plans in the private sector didn’t have to happen at all.

“It wasn’t an accident,” Schultz says in an interview. “It is the result of actions companies took starting in the 1990s to profit from their plans. Employers took perfectly healthy plans with a quarter trillion dollars in aggregate surpluses, and they siphoned out the money through a variety of means.”

The result has been a severe decline in private sector defined benefit (DB) coverage.

The percentage of Fortune 1000 companies with at least one frozen DB plan (where the sponsor company retains the plan but stops future accruals for all or some workers) more than quadrupled between 2004 and 2010.

The Congressional Super Committee hasn’t even started cutting Social Security, but advocates are already expressing concern on a different front: the payroll tax cut extension proposed last night by President Obama as part of his jobs plan. Those payroll taxes fund the Social Security program.

The President asked for a $175 billion one-year extension and expansion of the employee payroll tax holiday now in place, halving the tax rate to 3.1 percent in 2012. He also proposed halving employer payroll taxes to 3.1 percent for the first $5 million of payrolls in 2012. The president also wants a complete payroll tax holiday that would apply when companies grew their payrolls by up to $50 million in a year by hiring  new workers or raising the salaries of existing workers.

These cuts in the Federal Insurance Contributions Act tax (FICA) may be one of the best available stimulus options in the current political climate, and they will have a positive economic impact. An analysis by The Center for Budget and Policy Priorities notes that the cuts already in place make a substantial difference in the spending power of middle class families, and that allowing them to expire at this time would be very negative for growth:

Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce all paychecks starting on January 1, withdrawing needed support from the still-weak economy. The measure, part of the tax cut-unemployment insurance deal between President Obama and Republican leaders, reduces the employee share of the Social Security payroll tax, boosting workers’ take-home pay by an estimated $120 billion in 2011. The tax cut is worth $934 to the average worker.

And Moody’s Analytics estimates that allowing the payroll tax cuts to expire would reduce GDP growth by one percentage point in 2012, translating into one million fewer jobs by the end of next year.

But Social Security advocates worry that these temporary payroll tax cuts will never be restored. “The problem is, it is very easy in our current political climate to cut revenue and very hard to increase it,” says Nancy Altman, co-director of the Strengthen Social Security coalition and author of The Battle for Social Security, an excellent history of the program and its politics.

“Look at the controversy over ending the Bush tax cuts, which would only affect a small portion of taxpayers,” Altman says. “In this case, if you propose restoring the payroll tax down the road, you’d have to double the rates on workers making minimum wage. This is being sold as temporary, but it’s not likely to work out that way.”

Last week’s dismal unemployment report contained what looks like a glimmer of hope for older workers. The August jobless rate for workers over 55 was 6.6 percent – far below the 9.1 percent national average. The seasonally-adjusted jobless rate for older workers was down from 7 percent as recently as June, and it stands considerably below the 7.3 percent rate in August 2010.

But the August jobless numbers masks broader weakness in the job market for older Americans, because it measures only workers actively seeking employment. Many older workers have given up looking; only 1 percent of unemployed older workers are optimistic about finding jobs in the near future, while 30 percent say they are very pessimistic, according to recent research by Boston College’s Sloan Center on Aging & Work.

Older workers who do lose their jobs tend to remain jobless much longer than their younger counterparts – if they are able to find new work at all. And those who do find new work most often accept jobs with lower pay and less valuable benefits. So, to state the obvious: the best strategy for staying employed after age 50 is to keep the job you have, if at all possible.

Easier said than done, you say — and I agree. But that doesn’t mean there’s nothing you can do to boost your odds of staying employed, argues Alan Sklover, an attorney who has represented or coached hundreds of older workers in employment cases over his 30-year career. He also coaches older workers facing firings, downsizings or layoff.

Sklover acknowledges that age discrimination is “rampant” in the workplace — but he also says it is “natural and normal,” even though it’s illegal, adding that “We all make judgments based on age, no matter what anyone says.”

That means it’s that much more important for older workers to “find ways to enhance job security by making yourself indispensable. We’re all wired to be sensitive to our own self-interest, and an employer’s self-interest is to ask, ‘Is this person helpful to me? Can they help me be successful?’ That is always where it starts.”

Sklover offers the following eight strategies for enhancing job security have worked well over the years for his older clients.

Why has Congress raised the Social Security full retirement age but not the early age? Why don’t we fix Social Security’s finances by cutting administrative overhead? Why do Social Security numbers have nine numbers and what do the numbers mean? Who got the first Social Security card?

I get a constant stream of questions about Social Security — no surprise, since benefits are the most important source of income for most retirees. In fact, new data from the Social Security Administration shows benefits accounted for 38 percent of total income for Americans over age 65 and older in 2009 — up from 30 percent in 1962.

The flow of questions picked up speed after I published a primer on the program in the September issue of AARP Magazine. Here are some of the Qs along with my As . . . along with answers to a few questions I wish readers had asked, but didn’t.

Q: They have raised the retirement age for Social Security from 65 to 67 and now want to raise it to 70. Can anyone explain to me why haven’t they raised the minimum retirement age (62) to keep up with the maximum retirement age? Would raising the minimum age to keep it within three years of the maximum help to keep Social Security solvent longer?

A: Social Security’s Normal Retirement Age (NRA) is increasing gradually from 65 to 67 under reform legislation passed in 1983. Lawmakers kept the early retirement age at 62 to continue giving workers a choice to retire early, even though they would receive a proportionally smaller benefit as the retirement age increased.

Monthly Social Security benefits are reduced when you take early retirement. When the full retirement age was 65, the amount of the reduction for taking benefits at 62 was 20 percent; now that the age is 66, the amount of the reduction is 25 percent. When the full retirement age hits 67, the reduction will be 30 percent. The purpose here is to assure that someone filing at age 62 receives about the same in lifetime payments as someone who files later in life.

Keeping 62 as the early retirement age enables workers employed in physically-demanding jobs to retire without having to apply for disability benefits. In fact, proponents of increasing the early retirement age usually feel compelled to include some sort of mechanism to accommodate manual laborers who are no longer able to perform their past employment but are not impaired enough to qualify for disability.

“It’s a beautiful thing, the destruction of words,” wrote George Orwell in 1984. And so it is with a mangled word that is central to the 2012 presidential race and the work of the Congressional deficit-cutting Super Committee: entitlement.

In the context of federal programs such as Social Security and Medicare, the word entitlement refers to a benefit you are granted by law. You are entitled to the benefit not because it is welfare, but because it is a program you have paid into over time. You can count on it because it is insurance that isn’t subject to the judgment of a case worker or the spending priorities of budgetmakers.

This original – and accurate – meaning has been under attack ever since the days of the Reagan Revolution. One of the first shots was fired by David Stockman, the Reagan Administration budget director who famously called Social Security closet socialism and a “coast-to-coast soup line.” Stockman’s comment preceded Ronald Reagan’s proposal to slash Social Security benefits in 1981, a political debacle that ultimately led to the compromise reforms of the bi-partisan Greenspan Commission in 1983.

But the word entitlement has been under sustained and successful assault ever since, with the result that most Americans now understand it as a four-letter pejorative term connoting welfare—handouts for people who don’t pull their own weight. It’s used that that way by all Republicans, many Democrats and nearly all Beltway media.

Do entitlements play a role in our national debt problem? Yes and no.

Social Security doesn’t contribute directly to the deficit. The Social Security Trust Fund (SSTF) runs an enormous surplus – and despite what you hear, the program is cash flow positive if you include interest on SSTF bonds and income taxes paid on benefits by high-income recipients. Social Security does face a long-term imbalance around the year 2035, when the SSTF will be exhausted, but that problem can be remedied easily by eliminating the cap on income subject to payroll taxes (See: Warren Buffett.)

Social Security adds pressure on the deficit only in the sense that the SSTF surplus is invested in a special form of Treasury note that is owed back to the fund. But that obligation is no different than any other Treasury debt.

Jim Dundee’s business is doing well — he’s an optician and owns his own retail optical store near Tampa, Florida. But Dundee started to get nervous about the economy and stock market a couple months ago.

“Even though business has been great here, you could just tell by listening to customers. We serve a pretty savvy clientele, and they were all saying something was brewing and that stocks would take a hit.”

Dundee, who is 57, decided to reduce the exposure to stocks in his retirement portfolio. Working with his broker at Raymond James, he cut equities from 70 percent to 50 percent, with another 35 percent in cash; the remainder is in bonds and gold. He hopes to be “semi-retired” by 62 by scaling back time spent on his business. “I’m asking myself, how little risk can I get away with?”

Dundee is hardly alone. The percentage of U.S. households willing to take “above-average or substantial risk” to meet their financial goals has plunged among all groups according to to survey data from the Investment Company Institute (see chart, below). The decline has been sharp across all age groups, but is especially dramatic among older baby boomers.

And the market’s recent volatility has put new focus on a key question older investors have been asking themselves since the 2008 crash: what is the correct retirement portfolio equity exposure for investors close to retirement, or who already are retired?

Ask the experts, and you’ll get answers that are all over the map. The Putnam Institute recently surveyed target date funds and found that retirement date equity allocations ranged from 65 percent to just 35 percent. And Putnam’s own experts concluded that retirees should have no more than 25 percent of their money in stocks.

Meanwhile, T. Rowe Price advises retirees at age 65 to keep 55 percent of their money in equities, 35 percent in bonds and 10 percent in cash.

Past performance is no guarantee of future results, as the saying goes. But a new Fidelity Investments analysis of what’s happened to retirement investors’ portfolios since the 2008-2009 market crash is worth considering if you’re tempted to pull money off the table during the market’s current volatility.

The big message: Investors who held on tight through the harrowing 2008-2009 crash have been richly rewarded since then.

Fidelity looked at the performance of 7.1 million 401(k) accounts, comparing returns for investors who made changes to their portfolios during the 2008-2009 market crash up through June 30th this year — a point when the market was on an upswing preceding the steep drops and volatility that began in late July.

The key findings:

• Participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and stayed out of stocks through June 30th this year saw an average increase in account balance of only 2 percent.
• Participants who exited stocks but then returned to some level of equity allocation after that market decline saw average account balance increases of 25 percent.
• Investors who stuck it out with a continuous asset allocation strategy that included stocks had an average account balance increase of 50 percent.

Fidelity also looked at participants who stopped contributing to their 401(k)s during the 2008-2009 crash; they experienced an average increase in their account balances of 26 percent through the end of the second quarter, compared with 64 percent for those who kept making regular contributions.

Only a very small percentage of Fidelity’s 401(k) investors withdrew entirely from the market. Less than one percent of account holders (0.8 percent) bailed on all their equity investments during the 2008-2009 crash and stayed out entirely, according to Beth McHugh, vice president of market insights at Fidelity. And among investors who had been actively contributing before the crash, only 1.4 percent stopped doing so as a result of the downturn.

After the 2008 market crash, target date funds came under heavy fire for failing to protect older retirement investors. This time around, TDFs are faring much better – thanks to lessons learned a few years ago.

The basic idea of TDFs — to invest in a mix of assets with the aim of reducing equity exposure as participants approach retirement – is sound, since many investors don’t rebalance or pay attention to reducing risk as retirement approaches.

But many retirement investors don’t really understand how TDFs are allocated between equities and fixed income. Fees can be high, and some critics don’t think TDFs are structured to select the best-in-class funds for all asset groups.

Many TDF investors near retirement age suffered dramatic losses in the 2008 market crash. But an analysis prepared for Reuters Money by Morningstar shows that losses during the recent market meltdown have been far less severe this time for 2010 and 2015 TDF series. Morningstar compared these TDF series against the S&P 500 by measuring from the market’s 2011 peak (April 29th) to the trough (thus far) on Tuesday, August 8.

Morningstar calculated the percentage of the S&P 500 loss sustained by both TDF series, creating a comparative loss ratio that effectively measures how much of the overall market loss was absorbed by the target date funds.

The results point clearly to improvement in managing equity exposure for investors close to retirement:

• The 2010 fund series had a loss ratio of 43 percent this year, compared with 60 percent in 2008.
• The 2015 fund series had a loss ratio of 55 percent, compared with 74 percent in 2008.