No COLA - Bernanke gets Trumped?

Bruce Krasting's picture

Social Security announced that there will be no increase in benefit
levels for another year. The reason? Deflation. Based on the Cost of
Living index no increase in checks is justified. You might get an
argument on that from the 60+% of the beneficiaries whose primary source
of income is SS. This will impact the macro economic picture.

In the period 2000-2008 the average COLA increase was 3%. Because of the
big eco dump it has been zero for 2010 and now again for 2011.

SSA will pay ~$700b in benefits this year. 3% of that comes to $21b.
That is a pretty important number. Most of the SS checks are spent.
Little of it is saved, so this will impact consumption on a nearly 1 to 1
basis. $21b is 1/4% of our GDP (includes multiplier). Poof!

Does this matter? Sure it does. Economists who forecast growth will have
to knock down their numbers by at least ¼% as a result. There would
have been some multiplier affect from the extra spending, now there
won’t be any. Between the cummulative impact of two years of no
increases and the multiplier this could be a drag on GDP by 1/2% for
2011 versus what has been assumed.

We don’t know what Ben B will do in a few weeks, but we can sort of
guess about what is coming. It will be a longer-term commitment to
acquire Treasury bonds. The high-end estimates are about $100b per month
for a year. Something over a trillion in all. Using those kinds of
numbers, I have seen estimates that the impact will be a positive to GDP
to the tune of a lousy ½%.

So for those that have been believing that Bernanke has written the
economy a put, look again. You just got trumped, by of all things,
Social Security. Big Ben can’t row quick enough on this river. The water
against him is moving too fast.