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U.S. Economy

AARP Overstates Economic Benefit of Social Security

AARP Overstates Economic Benefit of Social Security

Photograph by Mikkel Grabowski/Gallery Stock

AARP claims in a new study that Social Security benefit payments support $1.4 trillion in U.S. economic output and more than 9 million jobs. Those are impressive figures coming from one of the most influential organizations in Washington, the kind of data points that might give Social Security some political cover as congressional negotiators look for ways to trim entitlement spending.

But AARP is using “fuzzy math,” as Andrew G. Biggs, a resident scholar at the American Enterprise Institute, observes in a column today in the Wall Street Journal.

The eye-catching numbers in AARP’s report reflect the gross contribution of Social Security to the economy, but the net impact is considerably smaller, as the report itself acknowledges. True, if Social Security were eliminated (which no one is proposing), benefit payments would drop to zero. But payroll taxes withheld from workers’ paychecks would also drop to zero. People would have higher take-home pay. Money would still get spent.

The AARP report says that Social Security recipients are more likely to spend an extra dollar of income than working people are. That’s true. Benefits go disproportionately to people at the lower end of the income scale, who are more likely to live from check to check. And, of course, to older people, who on average are gradually spending down their nest eggs.

But inducing more consumption is not a purely good thing. As AEI’s Biggs points out, the U.S. has a shortfall of savings. Social Security tends to shift money from savers to spenders, exacerbating the shortfall.

Social Security serves a crucial function, of course, in keeping the elderly out of poverty and destitution. But for AARP to brag about the program’s impact on consumption without acknowledging the downside is a bit misguided at a time when the U.S. is struggling to find ways to increase national productivity and close a long-term gap in the federal budget.

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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