Those holiday chit-chats (Social Security version)

Here's a helpful piece on why chained CPI for Social Security really stinks: Dean Baker, Thoughts on the Chained CPI, Social Security, and the Budget CEPR 12/17/2012. These are some basic facts about Social Security and Americans retirees:

While some people have tried to foster a myth of the elderly as a high living population, the facts don’t fit this story. The median income of people over age 65 is less than $20,000 a year. Nearly 70 percent of the elderly rely on Social Security benefits for more than half of their income and nearly 40 percent rely on Social Security for more than 90 percent of their income. These benefits average less than $15,000 a year.

The reason that seniors are so dependent on Social Security is that the other pillars of the retirement stool, employer pensions and individual savings, have largely collapsed. Defined benefit pensions are rapidly disappearing. Defined contribution plans, like 401(k)s have also proved grossly inadequate. Only around half of the work force even has a defined contribution plan available to them at their workplace. In a period of stagnant wages and limited employer contributions, workers have generally been unable to accumulate much wealth in these plans. According to the Retirement Research Center at Boston College, the median value of 401(K) and other defined contribution plans for those near retirement who have a plan is $120,000, enough to get an annuity paying $575 per month.

For most workers the vast majority of their wealth was in their homes. The collapse of the housing bubble destroyed much of this equity. Counting all forms of wealth, including equity in a home, the median household approaching retirement had just $170,000 in wealth in 2011.

Also, for those holiday chats, austerity economics sucks!

Historical examples: the Great Depression, Herbert Hoover, Heinrich Brüning, gold standard

Current examples: Britain, Greece, Ireland, Italy, Portugal, Spain.

Current counter-examples: Argentina, Iceland, the US (partially, and particularly in comparison to large European economies like Britain and Spain)

Not heading the right direction: the US, circa now.

As Suzy Khimm writes in The incredible shrinking stimulus New York Times Wonkblog 12/21/2012, Obama in the "fiscal cliff" negotiations has been reducing his demands for stimulative elements: "In his third offer, reported Monday, Obama dropped his ask from $425 billion to $175 billion in stimulus, ... keeping the federal extension of unemployment insurance, infrastructure spending and some business tax breaks, but abandoning the extension of the payroll tax holiday, among other major measures."

The stimulus value of business tax breaks are highly questionable. The best kind of stimulus would be to spend money on federal projects that create jobs.

She explains the concern about the "payroll tax holiday," which economists are inclined to like as a stimulus measure. But I've always worried that framing it as a payroll tax holiday was more very much related to Obama's desire for a Grand Bargain to cut benefits on Social Security, Medicare and Medicaid, encouraging the idea that raising the payroll tax was a bad thing, and also letting Social Security and Medicare opponents portray them as "welfare" because the General Fund replaces the lost revenue. Raising the payroll tax by lifting the cap on the portion of earnings to which it is applied is a very good idea.

The same tax cut could have been structured as a "rebate" coming out of the General Fund rather than as a temporary reduction ("holiday"). In any case, the economists are right to look at it in terms of it empirical effects, even if they tend to downplay the political risks in calling it a "payroll tax holiday." Khimm:

The White House's abandonment of the payroll tax [temporary cut] is of particular concern to economists and advocates who believe that more stimulus is necessary while the economy continues to recover — particularly if Democrats and Republicans fulfill their stated promise of passing a major deficit reduction package that will begin some of its austerity in the near term. Of all the parts of the fiscal cliff, continuing unemployment insurance has the biggest "bang for the buck" in terms of boosting the economy, according to Moody’s Mark Zandi's calculations of the fiscal multipliers. But the payroll tax holiday would boost the economy even more, as it would benefit far more households. At the cost of $115 billion, it would bolster the economy by $144 billion, according to the Economic Policy Institute.

Jared Bernstein, a former economic adviser to the White House, calls the payroll tax holiday "one of the most important components" in a potential stimulus package and believes the administration did make an effort to keep it on the table before deciding to give it up in last week’s round of negotiations. "I believe they fought hard for the payroll tax holiday, and they concluded it just wasn’t possible," says Bernstein. "They completely appreciate the importance of that holiday right now." [my emphasis]

If we want to look at economic policy as a morality play, then we should focus on the broad effects, not on some slice, e.g., unemployment insurance makes people lazy. Because the small-bore morality play arguments wind up attacking policy tools like unemployment insurance that provide excellent stimulus effects, because in this case most people spend the unemployment insurance payments right away.

Tags: austerity economics, barack obama, fiscal cliff, grand bargain, medicaid, medicare, social security