Monday, March 15, 2010

AARP Makes Spurious Argument for COLA

Cross posted from The Enterprise Blog.

Last Monday in the New York Times, I co-authored an op-ed with Alicia Munnell, professor of economics at Boston College and director of the Center for Retirement Research, regarding proposals to pay an ad hoc Cost of Living Adjustment (COLA) to retirees this year, to compensate them for Social Security not paying an automatic COLA in 2010. Our argument was pretty simple: there's no need for a COLA in a year in which the cost of living didn't increase—and we show that even using an inflation measure geared toward seniors the cost of living didn't rise.

In Sunday's New York Times the AARP responds. As you'd expect, they disagree. AARP's Chief Operating Officer Tom Nelson writes,

The article demonstrates the inadequacy of using textbook economics to discuss the actual experiences of real people. By arguing—despite the biggest economic downturn since the Great Depression—that "retirees did all right over the last few years," the authors demonstrate a lack of understanding of the negative impact of decimated retirement savings on older Americans.

A general note: when someone writes about "the inadequacy of using textbook economics" or something along those lines, what it usually means is that they're not going to bother disputing the arguments and evidence you presented.

As it happens, our article didn't actually rely on much economics, textbook or otherwise. It was really just simple math: when prices rise, Social Security benefits should rise to match them. When prices don't rise, well, you get the picture.

Now, you can make a case that seniors are suffering due to the recession, rising health costs, or what-have-you and therefore deserve government help. But that has nothing to do with COLAs. Moreover, to make that argument you presumably should present some evidence that seniors are suffering more than working age people, who are, after all, the folks who would pick up the tab for this ad hoc COLA. The evidence really isn't very strong: younger Americans have taken bigger hits to their retirement savings and are far more likely to be unemployed than seniors. And, unlike current retirees, younger folks are going to need to save far more for retirement as Social Security and Medicare won't be in nearly as good shape by the time we reach retirement age.

In a sense, I don't blame AARP. They're effectively lobbyists for seniors—very good ones, judging by the state of federal finances—and you can't fault them for trying to get more stuff for their members. But at some point we have to realize that there's no more money to give; it's time to start thinking about where we can cut back. It's very sad that even as deficits reach record levels and the national debt spirals upwards, interest groups continue to make spurious arguments for more. But that's where we stand.

1 comment:

Arne said...

I think that AARP is saying that seniors who had income that had income from other than SS now have less income and need help. I can believe it, but it has nothing to do with the lack of COLA.

But when you say, "younger folks are going to need to save far more for retirement as Social Security and Medicare won't be in nearly as good shape by the time we reach retirement age", you are missing a simple math calculation. Younger folks may want to save more to cover a better standard of living for a longer life, but the buying power of SS and Medicare will go up even if the gap is closed entirely by benefit cuts.

Note that the medical buying power is in terms of the number of hip replacements their parents got rather than the number the younsters will want.