David Leonhardt, writing in the New York Times, criticizes the proposed stimulus payment to U.S. Social Security recipients on the grounds that there are many better things to do. I am forced to agree.
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.
The president has proposed sending a $250 check to every Social Security recipient, which sounds pretty good at first. The checks would be part of his admirable efforts to stimulate the economy, and older Americans are clearly a sympathetic group. Next year, they are scheduled to receive no cost-of-living increase in their Social Security benefits.
Yet that is largely because they received an artificially high 5.8 percent increase this year. For this reason and others, economists are generally recoiling at the proposal.
President Obama’s own economic advisers raised objections, as my colleague Jackie Calmes has reported. Isabel Sawhill of the Brookings Institution told me she thought the idea was crazy — and then noted she was in her 70s. Rosanne Altshuler, co-director of the Tax Policy Center in Washington, says that the checks “seem to be pure pandering to seniors.”
Indeed, the politics are attractive. People over 65 vote in large numbers. Saying no to them is never easy.
And therein lies a problem that’s much larger than one misguided $14 billion proposal.
With the economy gradually improving, members of Congress and White House officials are just starting to think more seriously about the budget deficit. Fifty-three senators voted down a narrow health care bill last week, with many citing its potential impact on the budget. On Monday, Christina Romer, the chairwoman of Mr. Obama’s Council of Economic Advisers, gave a speech in which she said the deficit was “simply not a problem that can be kicked down the road indefinitely.”
Just about everybody agrees that solving the deficit depends on reducing the benefits that current law has promised to retirees, via Medicare and Social Security. That’s not how people usually put it, of course. They tend to use the more soothing phrase “entitlement reform.” But entitlement reform is just another way of saying that we can’t pay more in benefits than we collect in taxes.
“If the long-term issue is entitlement reform,” says Joel Slemrod, a University of Michigan economist, “the fact that the political system cannot say no to $250 checks to elderly people is a bad sign.”
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The first Social Security check was mailed in 1940 to Ida May Fuller, a retired legal secretary in Ludlow, Vt. It was for $22.54. Every month for the next 10 years, Ms. Fuller received a check for that same amount.
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 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.
This year, the coin finally came up tails.
With oil prices plunging and other prices falling, last year’s high inflation (which led to the 5.8 percent increase in Social Security payments) has turned into deflation. Overall prices have dropped 2.1 percent in the last year, according to the relevant price index.
Social Security payments, however, will remain as they were, which means that recipients are already set to receive an effective raise, even without Mr. Obama’s $250 checks. No matter what happens with that proposal, 2010 will be the first year since at least the Nixon era that the buying power of an individual worker’s Social Security goes up.
Compare that to what’s happening with minimum-wage workers in Colorado. Their wage is also tied to inflation, but it has no floor. So it will fall slightly next year, to keep pace with prices.
Now, I understand that there are arguments on the other side of the issue. Lawrence Summers, Mr. Obama’s top economics aide, pointed out that the stimulus bill included one-time $250 payments for Social Security recipients, which were sent out this year, but tax cuts for workers both this year and next year. “We’re correcting an anomaly,” he told me.
Others will argue that the elderly simply need help. Some have been the victim of age discrimination. Too many still live in poverty. All of them are likely to see their Medicare premiums rise in 2010. This recession has spared no group.
But older Americans really have survived the recession better than most.
Many of them started buying assets years if not decades ago, meaning they were not the main victims of the stock and housing bubbles. They had a cushion. In addition, relatively few of them work in manufacturing or construction, the hardest-hit industries.
Just consider: The real median income of over-65 households rose 3 percent from 2000 to 2008. For households headed by somebody age 25 to 44, it fell about 7 percent.
Economic policy, like most everything else, is about making choices. Mr. Obama is choosing the elderly, rich and poor, to be more worthy of $14 billion in government checks than struggling workers or schoolchildren. Republicans have pandered in their own ways, choosing to oppose just about any cut in Medicare and, in effect, to stick your grandchildren with an enormous tax bill.
In a way, I understand where the politicians are coming from. We voters may say that we are in favor of cutting the deficit, but usually mean it in only the theoretical sense. Who wants their own benefits cut? For that matter, who is even willing to have their Social Security checks hold steady?
E-mail: leonhardt@nytimes.com
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