Thursday, October 29, 2009

Are Those $250 Social Security Checks Just Pandering to Seniors?

David Leonhardt tries to make this case and he would have been well advised to start with this:

The original Social Security legislation had not included an inflation adjustment, which meant benefits did not keep up with the cost of living. A decade later, Ms. Fuller’s checks were worth about 40 percent less in real terms than when she started receiving them. Congress finally increased benefits in 1950 and then continued to do so in fits and starts, sometimes faster than inflation, sometimes slower and usually in an election year. President Richard M. Nixon and a Democratic Congress brought some order to this process in 1972, by automatically tying the benefits to the movement of an inflation index in the previous year. The changes were part of the transformation, during the middle decades of the 20th century, in how this country treated the elderly. In the 1930s, they had little safety net and frequently struggled to meet their basic needs. Four decades later, they were the only group of Americans with guaranteed health care and a guaranteed income. All in all, it was certainly for the good. But by the 1970s, you could start to see the early signs of excess. In their bill, Mr. Nixon and Congress included a little bonus: the increase in Social Security payments could never be less than 3 percent, no matter what inflation was. In the 1980s, Congress reduced the floor to zero — meaning that benefits would be held constant if prices fell — but the principle remained the same: heads, it’s a tie; tails, Social Security recipients win.

The argument would be that even with a zero nominal increase, Social Security recipients see an increase in real income during a period of deflation. Yes – there are the caveats about whether the CPI properly captures the cost of living for seniors especially if the relative price of drugs increases. But why did Mr. Leonhardt start his discussion by talking about the depressed economy and who would be most likely to consume any checks that the government may wish to extend?

If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose: a) Teenagers and young adults, who have an 18 percent unemployment rate. b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits. c) The taxpayers of the future (by using the $14 billion to pay down the deficit). d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance. The Obama administration has chosen option d — people in their 60s and beyond.

Let’s think about the macroeconomic impact of a $14 billion one-time transfer payment in terms of a life-cycle model of consumption. This would be equivalent to a one-time increase in household wealth with the impact effect on consumption being equal to the increase in wealth divided by the number of remaining years of life for the individual receiving the check. If a young person were given $250, he would likely save most of it. If the $250 were given to the elderly instead, then more of the transfer payment would be consumed. Mr. Leonhardt seems to be unhappy with the President’s proposal but his reasoning here seems to be very confused.


Sandwichman said...

Actually, PGL, the life-cycle model has been shown to be empirically wrong. Seniors save MORE of their income than prime-age earners. A young person would be likely to save NONE of it rather than MOST of it considering there's 30% U6 labor under utilization for 16-24 year olds and that many more will be, say, going to school or working at entry level jobs etc.

It makes more sense to base a practical decision like this on the empirical evidence rather than on a "model" that has been shown to be wrong.

Anonymous said...

Leonhardt presents his alternatives as a push-poll question.

BruceMcF said...

Don't know many young adults, eh, PGL?

And, yes, the four options Leonhardt presents are an egregious case of pushing your argument into the choices offered, as in a push poll. The presumption for (c) is that total real GDP over time is independent of fiscal policy, which is quite absurd.

Sandwichman said...

Correction: older people have a higher propensity to save income from employment. So that might not necessarily apply to pension or social security income.

Shag from Brookline said...

Query: Does Walker's correction take into consideration that money is fungible and older people spend what they have to for survival, whether from employment (if available to geezers) or pensions/social security income? At age 79, I'm not looking forward to the $250, but if it comes, I'll spend it as needed. Perhaps the $250 is needed more for younger groups upon whom we geezers rely for our social security income.

Sandwichman said...


Yes. I would expect that many older people who continue to work have more discretionary income than those who don't work. Not least because it would tend to be professionals and higher income people who have both the opportunity and incentive to continue working after age 65. So it wouldn't be prudent to generalize from how income from work is saved or spent to all income. People who must rely ONLY on their pension income would be more likely to spend the $250.

ProGrowthLiberal said...

Dean Baker has an interesting critique of this NYTimes oped:

In it, one of Dean's points goes something like this:

"The elderly will spend a high share of their checks, which makes this a good form of stimulus."

Dean seems to be relying on the same life cycle model thinking that I relied upon.

Min said...

"If a young person were given $250, he would likely save most of it."

What planet do you live on?

Anonymous said...

What Min said.
The author made also one additional point - that seniors are the group that have arguably been hurt the least in this downturn whilst the young have been hurt the most.

And in my experience, youth spend, elderly (even when not employed) hoard. My elderly neighbor owns the building, lives in its second floor apartment and the commercial space on the ground level has been vacant for 30 years because she doesn't want a downstairs neighbor and doesn't want to move. Due to the location, it literally does bring down the entire core of the town having a perpetual vacancy in that spot.

A young person would never do that or be like that.