Tuesday, January 6, 2009

Social Security COLA as economic stimulus?

Josh Zumbrun of Forbes
writes that the 5.8 percent Social Security COLA – the biggest since the early 1980s – couldn't have come at a better time.

While a new Congress and a new White House debate details of an economic stimulus plan, Social Security recipients are already reaping a $38 billion windfall …."If they perceive they're getting a raise in their Social Security benefits, it should have a stimulative effect," says Andrew Biggs, a former deputy commissioner for the Social Security Administration and a resident scholar at the American Enterprise Institute. "Seniors seem to be very pleased that they're getting such a large COLA," Biggs says.

It's important to note that perceptions are a big issue here. The Social Security COLA is perceived by many seniors and the press as a "raise" when it fact it exists merely to keep the purchasing power of Social Security benefits from falling. However, the fact that this large nominal increase in Social Security benefits is occurring at a time when prices are actually dropping, since last year's high inflation has been followed by deflation in recent months – may cause seniors to feel their incomes are rising. If so, they may choose to spend a bit more.


No comments: