An opinion piece appeared in the Wall Street Journal on October 17, 2013 written by Andrew Biggs, the former deputy commissioner of the Social Security Administration. He offered a counterpoint to a published report from the American Association of Retired Persons (AARP) claiming that "Social Security generates nearly $1.4 trillion in economic activity and supports more than nine million jobs."
In 2012, Social Security paid out almost $715 billion in retirement, survivors and disability benefits. The AARP report correctly points out that recipients spend those benefits which then trickle down through multiple layers of the economy. "Because of the mulitplier effect, every dollar of Social Security paid out translates to almost two dollars in spending in the United States."
Of course, AARP rightly views Social Security as a critical safety net for their senior citizen constituents. But this does not excuse them from publishing a report that engages in fuzzy math. What the study overlooks is the money pulled out of the economy through Social Security payroll taxes to fund these benefits. Retiree spending undoubtedly has a multiplier effect, but reduced saving and spending from workers resulting from the payroll tax has an offsetting "divisor effect."
The article quotes many other studies that consider the effects of government transfers that reach a very different conclusion. This more objective view suggests the economic effect of Social Security benefit payments is not $1.4 trillion or nine million jobs. At best, it's zero!
There is probably little debate about the benefits to society as a whole for helping support seniors and others who would be at risk without Social Security. But offering distorted economic arguments only makes rational discussion more difficult. Recent events demonstrate there is an extreme shortage of rational discussion in Washington D.C. already.
To quote Mr. Biggs, "just as in grade-school mathematics, when you consider only one side of an equation, you're almost sure to get the answer wrong." Let's hope our representatives in government consider both sides of every issue so we can begin to see rational, bipartisan solutions to the complex challenges of our time.
The views expressed are those of Lindsey Randolph and should not be construed as investment advice. All economic information is historical and not indicative of future results. All information is believed to be from reliable sources; however, we make no representations as to its completeness or accuracy. Discuss all information with your advisor prior to implementation.