Saving Social Security

The stimulus bill approved by Congress last week - and due to be signed into law
by President Obama [today] - is a very good first step toward slowing
the economy's decline, but it clearly is not large enough to accomplish
the job. The US economy
will be seeing a loss of close to $2.6 trillion in demand over this
year and next due to the collapse of housing and commercial property
bubbles.

To counteract this collapse, Congress gave President
Obama just over $700bn in real stimulus. President Obama will have to
make further requests from Congress to close the gap between what the
economy needs and the stimulus package approved last week.

However,
there is one step that President Obama can take to boost the economy
without going through Congress: he can reaffirm his support for social
security, and assure the baby boomers nearing retirement that he will
not allow their benefits to be cut. If this huge cohort - now in their
late 40s, 50s and early 60s - know that they can count on getting their
promised benefits, they will feel more comfortable spending and
supporting the economy at a time when it badly needs a boost.

The
impact of social security on boosting consumption has long been touted
by economists, most importantly Harvard economics professor Martin
Feldstein, who had been Ronald Reagan's chief economist and is now an
advisor to President Obama. (We will ignore the fact that his early
results on this topic were driven by a programming error and that his
later results disappeared with government data revisions.)

Feldstein
claimed that workers spent more money during their working years than
they would have otherwise because they expected to receive social
security benefits when they retired. Therefore they had less need to
save for retirement.

However, many workers may not be expecting
to receive their social security benefits because there has been a
concerted effort over the last quarter of a century to undermine
confidence in the programme and to cut the level of benefits. If
workers question whether they will get the social security benefits
they have paid for, they will feel more need to save rather than spend.

Workers
are likely to be especially fearful about the prospects of getting
their social security benefits now due to an all out assault on the
program financed by billionaire banker Peter Peterson.
Peterson has spent much of the last two decades trying to cut social
security, Medicare and other benefits for the elderly. He recently
contributed a billion dollars to a foundation bearing his name that is primarily committed to this goal.

Peterson's
investment has paid off both in exposure from the media and more
importantly attention from many members of Congress and their staffers.
There are now dozens of senators, congress people and their staff
running around Capitol Hill crafting creative new ways to cut social
security. Baby boomers are right to fear that Peterson and his crew
will take away their benefits.

While the idea of taking away
benefits for which workers had already paid was always outrageous, it
especially outrageous at a time when these workers have just seen much
of the wealth in their homes and their retirement savings disappear in
the housing crash and the collapse of the stock market. Making matters
even worse is that fact that Peterson's friends in the financial
industry, along with many of the economists who would like to cut
Social Security, were the primary culprits in this disaster story.

But,
President Obama can quickly get us beyond this attempted heist to the
benefit of both older workers and the economy. He can simply assure the
baby boomers that he will not allow the Peter Petersons of the world
attack their benefits.

In fact, he should assure the baby boom
cohorts that their social security benefits are safer than having money
in the banks (even the government insured ones) and that they can plan
accordingly. This may not lead to a huge burst of new spending, but
baby boomers will spend more confidently through time knowing that they
can count on getting the benefits they have earned.

President
Obama will clearly have to take other steps to get the economy fully
back on its feet, but a simple speech assuring baby boomers that social
security is safe will be an important step in the right direction. This
speech also has the additional advantage that, unlike other forms of
stimulus, it doesn't cost anything. As we all know, talk is cheap.