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Reason Foundation

Treating the Elderly Like Spoiled Brats

The case against giving a tax-free bonus to Social Security recipients

Steve Chapman
October 19, 2009

When inflation hits, every dollar in your bank account is worth less each day. Deflation is just the opposite: You put your feet up and watch your money grow in value. The latter is what is happening now to America's seniors. And politicians think they should not have to stand for it.

The other day, the federal government announced that for the first time since cost-of-living adjustments were begun in 1975, Social Security recipients will not get an annual raise in their monthly checks. This decision is not the result of a fit of fiscal austerity or a sadistic desire to punish old people. There won't be a raise to offset inflation for the simple reason that there has been no inflation to offset.

Last year, seniors got a big raise because consumer prices had jumped 5.8 percent in one year. In the following 12 months, though, the Consumer Price Index has dropped by 2.1 percent. So in the coming year, Social Security payments will stay the same and be worth more than they used to be.

But so what? Groups representing the elderly, like AARP, have come to regard the annual raise as a sacred birthright in good times as well as bad, and few in Washington want to argue with them. President Obama has proposed giving every Social Security recipient a tax-free $250 bonus in lieu of a cost-of-living adjustment. Congressional Democrats are all for it, and the Republican leadership sounds agreeable.

A consensus like that happens only when someone comes up with a simple, appealing, and thoroughly horrendous idea. As it is, the cost-of-living rules are a great deal for seniors. Retirees get more money when prices rise, but they don't have to give any of it back when prices fall. The ratchet works only in their favor.

It's not easy to make a case for enriching seniors at a time when working-age Americans are suffering, but Obama and his allies are trying. The president insisted that "we must act on behalf of those hardest hit by this recession."

Who is he kidding? His policy would help those with the most protection. The people hit hardest by the recession are those who have seen their earnings vanish along with their jobs. Social Security recipients are assured of a stable stream of income even when companies are cutting payroll with a chainsaw.

Obama also claimed the help is essential because "countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis." What's his excuse for singling out seniors? Most everyone with a house or a 401(k) has gotten whacked, and the government can't afford to help them all.

What no one mentions is that Social Security beneficiaries already got a bonus in the original $787 billion stimulus package, which provided them with payments of $250 apiece. That's the rough equivalent of a 2 percent COLA. If the president gets his way, they will get a total of 4 percent. That, in combination with the drop in the CPI, means they'll have about 6 percent more in inflation-adjusted dollars this year than last. Not many other Americans can say that.

The final pretext is that the payouts will provide "a boost to our economy," in the words of House Speaker Nancy Pelosi—presumably because they will spur spending. Trouble is, giving people money doesn't mean they will head to Walmart. When the Bush administration sent out rebates, most of the cash apparently went to pay off debt or bolster savings, neither of which spurs the production of goods and services.

"Because of the low spending propensity, the rebates in 2008 provided low ‘bang for the buck,’” concluded a study by University of Michigan economists Matthew Shapiro and Joel Slemrod. "Given the further decline of wealth since the 2008 rebates were implemented, the impetus to save a windfall might be even stronger now."

The cost of this stimulus would be $13 billion, according to the White House. But if the $787 billion stimulus served its purpose, why is the additional boost necessary? If $787 billion didn't do the trick, what is $13 billion going to accomplish?

My suspicion is that most old people, given the facts, would be mature enough to understand that there is no good excuse for this windfall. It's the politicians who need to grow up.

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