No COLA - Bernanke gets Trumped?

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 cumulative 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.