Monday, March 20, 2023

How Biden’s Social Security Demagoguery Is Stoking Inflation

President Joe Biden has a long and storied history of attacking Social Security. His political posturing over how to solve its structural shortfalls will have harmful consequences. Specifically, uncertainty over Social Security’s future could be exacerbating labor market shortages — one of the prime drivers of rising prices.

The Wall Street Journal recently ran a story about workers approaching retirement age who are claiming Social Security “out of fear their benefits will be cut once the program runs short on cash.” It interviewed one New Jersey-based individual who stated that the uproar over Social Security at last month’s State of the Union address prompted him to accelerate his plans to retire at age 62, the earliest he can claim benefits.

The types of anecdotes the Journal examined have hard data to back them up. A 2021 study by Boston College’s Center for Retirement Research found that negative press references to Social Security’s finances increase Americans’ eagerness to claim benefits earlier. Specifically, headlines surrounding the program’s insolvency prompted survey respondents to state they would retire one year earlier, on average. That finding was consistent with prior studies showing “that workers adjust their labor supply and private saving in response to policy uncertainty around future Social Security benefits,” according to the study.

Claiming Social Security benefits early brings with it consequences on multiple levels. Particularly for individuals in good health and/or with other financial resources in their early 60s, claiming benefits early — which reduces the benefits paid monthly for the rest of one’s life — may not be the best financial decision.

Exacerbating Labor Shortages

On a macro level, more individuals departing from the workforce worsens existing trends. As of the February employment survey, the labor force participation rate (62.5 percent) has yet to reach the level of February 2020, before pandemic-related shutdowns hit (63.3 percent). And workforce participation rates are nowhere near as high as the roughly 66 percent rate in the years before the financial crisis of 2008 — representing millions of Americans who have left the workforce.

These missing workers come as inflation persists, primarily in labor-related service industries. As of last month’s data, core (i.e., excluding volatile food and energy) consumer prices for goods (e.g., bicycles, furniture, etc.) rose only 1 percent on an annual basis. By contrast, core prices for services (e.g., haircuts, health care, etc.) rose by 7.3 percent compared to February 2022, much faster than goods inflation and faster than the 5.5 percent increase in the overall core CPI.

To put it in plain English, businesses’ inability to find and retain labor has led to an increase in wages, and companies have had to raise prices to offset their increased costs. Now that goods inflation appears to have moderated, this “wage-price spiral” in labor-intensive service industries represents the prime cause of continued price spikes.

There are two obvious ways to break a “wage-price spiral.” On the one hand, actions whereby people defer Social Security, and remain in or rejoin the workforce, could increase the supply of labor, moderating the pressure for wage increases that are driving the spiral. Alternatively, the Federal Reserve could jack up interest rates so high as to suppress the demand for labor, likely causing a recession in the process. Guess which scenario poses the less painful option?

Need to Expand the Workforce

We have many reasons to want a bigger workforce. Bringing people back into the labor supply would help to restrain inflation, expand the economy’s potential growth rate, and increase the Social Security revenue base to boot.

As for those approaching retirement age, they likewise have every reason to continue working, provided they are healthy enough to do so. Delaying retirement by one year provides a guaranteed “return,” via a permanent increase in one’s monthly benefit, of 6-8 percent — a guarantee no stock market can match. And as to any potential changes to Social Security, if Washington does end up changing benefits, those changes would (and should) affect people who are relatively affluent and have many years to retirement — in other words, people like me — rather than current seniors.

Sadly, President Biden has no incentive to point any of this logic out to individuals, and will instead likely spend the next 18 months trying to win re-election by scaring seniors about the future of their benefits. Even more unfortunately, the more “Ol’ Windbags” bloviates to help extend his political career, the more the American people will suffer the real-life economic effects of his scare campaign.

This post was originally published at The Federalist. It was corrected subsequent to publication to reflect that the 66% labor force participation rate occurred prior to the financial crisis, not the COVID pandemic.