AARP Forgot Basic Math

October 24, 2013

AARP -- formerly known as the American Association of Retired Persons -- recently released a report proclaiming that "Social Security Generates Nearly $1.4 Trillion in Economic Activity and Supports More Than Nine Million Jobs." As great as that sounds, AARP's study is fundamentally flawed, says Andrew Biggs, a resident scholar at the American Enterprise Institute.

  • Last year, Social Security paid out almost $715 billion in retirement, survivors and disability benefits.
  • Retirees spend their benefits on food, for example, creating incomes for the supermarket owner and employees, who then spend these incomes, and so on.
  • The report concludes: "Because of the multiplier effect, every dollar of Social Security paid out translates to almost two dollars in spending in the United States."

The problem is that AARP overlooks the money pulled out of the economy through Social Security payroll taxes to fund these benefits.

  • These taxes have what we might call a "divisor effect" -- for each dollar of taxes levied, workers have less to spend, and that reduction is passed on throughout the economy.
  • If workers spend the same percentage of their incomes as retirees, then the net economic effect of Social Security isn't $1.4 trillion or 9 million jobs. It's zero.

AARP's conclusions about Social Security and the economy point people in a direction -- raising benefits by raising taxes -- that is most likely to reduce long-term economic growth. Unfortunately, AARP has published similar articles on the purported economic benefits of state and local government pension plans that are just as preposterous. But just as in grade school mathematics, when you consider only one side of an equation, you're almost sure to get the answer wrong.

Source: Andrew G. Biggs, "AARP's Fuzzy Math on Social Security," Wall Street Journal, October 16, 2013.

 

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