No, Robert Shiller, We Shouldn’t Index Social Security Benefits to Economic Growth

Over the weekend, Robert Shiller wrote a piece in the New York Times arguing that the two political parties should reconsider how they want to approach reforming Social Security. Recently, Republicans and Democrats have started to converge on a compromise to keep the trust fund solvent past 2033, the current projected year in which reserves run dry, by cutting benefits without explicitly saying they’ll be cutting benefits (which is a huge part of the appeal). Without getting too far into the weeds, it suffices to say that the current price index used to make cost of living adjustments for Social Security has been overestimating the rate of inflation for goods and services typically purchased by seniors and we can save money by indexing benefits to a stingier, but more accurate, measure of inflation. Because this new price index is more accurate, politicians can dodge claims that they cut benefits (even though in reality this would mean someone retiring today would receive about 5% less over the next 20 years).

Shiller takes issue with this compromise, not out of liberal anger that it will cut benefits too much or out of conservative conviction that it doesn’t cut enough, but because he sees the purpose of Social Security as a way for younger generations to take care of older generations, with the level of care depending on the state of economic growth. In his mind – and this is key – he thinks benefits should increase more during fat years and less during lean years, which would send a “we’re all in this together” signal to the country.

While this novel view of Social Security has some intuitive appeal, Shiller’s plan is another instance of economists trying to turn economics into a morality play. Just because some people in society are hurting, that doesn’t mean others – and especially not those who are most vulnerable – should suffer unnecessarily.

What’s more, this solidarity of suffering would most likely worsen and prolong the economic downturn, further increasing the pain of all people. This is likely because one of the hidden virtues of Social Security is that it is moderately countercyclical. Social Security transfers are a form of exogenous spending, which means they don’t decrease as incomes decrease. In fact, as a share of GDP, Social Security spending actually increases during recessions.

In a way, Social Security checks, along with food stamps and Unemployment Insurance benefits, put a floor on aggregate demand. Best of all, the countercyclical effects of Social Security occur without Congress having to pass new legislation or the Fed having to guess that we are in fact in a recession and cut interest rates accordingly. The transfers increase as a share of GDP automatically as we enter a recession. This makes sense, as more people opt to take Social Security early at 62 rather than fight younger workers for fewer jobs as the labor market deteriorates.

Social Security spending as a share of GDP

Looking back on the policy response to the Great Recession, many economists and bloggers have argued that more automaticity in fiscal and monetary policy would have blunted the severity of the downturn and helped speed along the recovery, which we are still muddling through. For fiscal policy, Clive Crook has suggested we institute a national sales tax (consumption is more pro-cyclical than income), eliminate the tax preferences for debt, and increase the funding and expand the scope of the Trade Adjustment Assistance program. On the monetary policy front, we should change to a rule-based policy, like NGDP-level targeting, which would remove some of the discretion, and therefore some of the delay, in combatting recessions. In contrast to these policy changes, indexing Social Security to GDP growth would turn the program into an automatic destabilizer, immiserating seniors along with the rest of the public. Solidarity of this kind is overrated.

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