AARP: Social Security Another Magical Stimulus – Part 2

Supporting the fight for the (SAFE) Retirement Act of 2013

Read Part I of this article here.

AARP’s premise:  “Social Security Generates $1.4 Trillion in Economic Activity and Supports More Than 9 Million Jobs.”  [AARP Press Center, October 1, 2013](1) Fact:  Social Security paid out $775 billion in retirement, survivor, and disability payments in 2012. AARP asserts the well-known “Multiplier Effect.” Supposedly, Social Security payments create economic benefits worth nearly double what is given to recipients.

  • The disability payment component of “Social Security” is smaller but rapidly growing, creating a potential for a NEGATIVE economic effect and job LOSSES. This is due to possible “moral hazard.” There is always temptation for people to “game” the system by asserting the inability to work and earn their own income when they are capable of doing so. This reduces the workforce and the multiplying wealth effect of their labor. If eligibility for disability payments becomes lax enough (as it has over the last 5 years (3)), then workers at the marginal end of the employment spectrum are actually encouraged to exploit the system. Today, we are practically recruiting to disability status, contributing to the cash flow imbalance of the system.
  • The study lauds our Social Security as the most successful government program and a “critical federal program.”  Nine of ten seniors rely on Social Security. “For most of them, Social Security is the foundation of their economic security.” Now, why those dollars are the foundation instead of the upper story, I have no idea. Why are not other sources of planned retiree income the foundation? But supposing that to be true, why must Social Security be the foundation? These statements assume, of course, that there were no alternatives. What about state, county and municipal old age welfare programs, which were squeezed out over the last 80 years by Social Security? What about employer pensions? What about private insurance and annuities similarly forced to compete with Social Security over the past decades? This is the Unseen. What would have happened if workers had saved trillions of their own dollars, invested by financial institutions over the decades? In public policy discussions, ignoring private alternatives that add more ultimate wealth to a nation has become de rigueur today.
  • Perhaps the Social Security “multiplier effect” can be justified as a short-term stimulus because today’s retirees will spend a higher percentage of their income than today’s workers who pay the taxes. That is debatable, but what about the long term? Money is spent on goods and services, which have to be produced by people. Long-term, societies with higher savings rates generate more output, income and economic activity. The U.S. is a premier example of that historically, but not today with a savings rate of 4%, less than half our historical rates (4).  The piper is always ultimately paid. Not only are taxes paid today not an addition to long-term economic activity, they enhance spending, diminish savings and deprive our future of capital investment, productivity and jobs, which are the true multipliers of future economic activity. (5)

The real reason the study was commissioned by AARP (one author works for AARP) is revealed in the conclusion of their Executive Summary:  “…reducing benefits by 25% across the board (as the SSA projects will be necessary by 2033 if no changes are made) …could cost the U.S. economy about 2.3 million jobs, $349 million in economic output…in 2012 terms.” So with the admission that they are ignoring all of the negative multipliers of the system, they conclude and AARP trumpets catastrophic results of any diminishment of the program. This is what passes for economic reasoning.

Magical thinking works no better in our lives and the lives of our clients than it does on the national level. Accounts balance in the end. Private insurance has a venerable history of accumulating savings safely with guarantees and provides dependable income. Private insurance is not a welfare program for everybody. Private alternatives should always be emphasized over public, even more so when the projected OASDI financial imbalance handwriting is on the wall, as it has been for decades. The safe accumulation and income guarantees you sell as an insurance agent cannot be overemphasized. They are more valuable today than ever.


(1)   Social Security’s Impact on the National Economy, Gary Koenig, AARP Public Policy Institute, Al Myles, Mississippi State University

(2)    Social Security’s Impact on the National Economy, Gary Koenig, AARP Public Policy Institute, Al Myles, Mississippi State University

(3)   “Higher debt tends to imply lower output and income in the long run than does lower debt, because increased government borrowing generally draws money away from, or “crowds out,” private investment in productive capital.” – CBO, March 2012, The Long-Term Budgetary Impact of Paths for Federal Revenues and Spending Specified by Chairman Ryan

(4)   Beyond Our Means, Sheldon Garon

(5) Long-term economic growth requires capital investment – in infrastructure, education and technology, for example, as well as in factories, business expansion, and so forth – and the main domestic source of funds for capital investment is household savings. Consistently high saving rates over time in a country can translate into funds being available for growth.

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