Social Security bolsters economic growth and development

In a recent paper, estimate how expansionary social insurance programs have helped to prop up the global economy. Summers and Rachel estimate that expanding programs such as Social Security and Medicare pushed the “neutral” (a.k.a. “equilibrium” or “natural”) real interest rate up by 3.2 percentage points over the past 40 years in the U.S. and other advanced economies. Since Rachel, Summers and others estimate that the real neutral rate—the highest rate consistent with maintaining full employment—is now barely above zero, this suggests that past these expansions, rather than being a drag on growth, have buoyed what would otherwise be an economy requiring large budget deficits to stay afloat. To recap, both Keynesian and supply-side models are in agreement that the Act would have the intended effect of increasing retirement income, smoothing lifetime consumption, and redistributing from working-age and higher-income households to retirement-age and lower-income households. They also agree that expanding benefits will tend to reduce private saving, though supply-side models such as the PWBM emphasize this aspect more (and the effect of the Act on national saving is ambiguous because it also closes Social Security’s projected shortfall). However, the two types of models differ as to whether more saving or more spending is needed to boost economic growth. If an otherwise useful policy slows growth, this is not by itself reason to dismiss it out of hand. Growth and distribution both matter if the goal is improving the lives of the greatest number of people, and Social Security is modestly redistributive toward people with lower incomes. Moreover, policies that have other benefits—in the case of Social Security, smoothing consumption over the life-cycle and insuring against death and disability—can improve wellbeing regardless of their effects on distribution or economic growth. In this case, however, there is reason to doubt that the benefits of Social Security expansion come at the expense of economic growth. Rather, Social Security expansion is a win-win policy, except maybe for wealthy people trying to avoid paying payroll taxes on earnings above the current cap. Note: The description of the Rachel and Summers paper contained an error that was corrected on October 18, 2019.