photo: Kerry Vaughan (flickr)

Tara Siegel Bernard wrote an article in the New York Times describing the impact of cutting Social Security benefits by raising the retirement age to 70. Alan Simpson will be shocked to learn that he was dead wrong when he said

We’re trying to take care of the lesser people in society and do that in a way without getting into all the flash words you love dig up, like cutting Social Security, which is bullshit. We’re not cutting anything, we’re trying to make it solvent.

The relatively objective financial advisers interviewed by Bernard call that nonsense. They are advising their clients to assume that their benefits will be cut by 19%. They recommend that clients increase their retirement savings by an amount sufficient to make up for that loss. Bernard gives three examples of the amount of loss for three different age groups. She only addresses people in the upper income brackets, assuming, for example, that her 35-year old couple is making a combined $120,000. This couple will have to save an additional 9.4% of their incomes each year, just to make up for the loss of Social Security Income.

Note that these aren’t even the lesser people; these are people with good jobs and lots of disposable income, who have to save more so John Boehner can have his wars, and Peter Peterson can unclench about tax hikes on his gigantic income.

But that’s not all. More savings means less current consumption. What is the effect of that in an economy already suffering from low consumer demand? My back of the envelope calculations show that for just the group 25-55, there would be a permanent reduction of consumption of $65.9 billion every year. That’s over 1% of the total consumer expenditures in 2008. We should add something for increased savings by the rest of the population, but that is harder to estimate.

Savings are equal to investments. If there is no demand for investment, as is the case now, the returns to capital will drop, especially for small investors. That means an even greater amount of money will have to be saved, resulting in a greater decrease in consumption.

Republicans and Democrats who want to cut Social Security benefits are going to wreck the economy.
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Calculations. Let’s assume that we are only dealing with the cohorts from 25 to 55. According to this from the Bureau of Labor Statistics Consumer Expenditure Survey (CES) for the year ended 2008, there were a total of 68,656,000 consumer units in those cohorts.

This CES chart tells us about income: 14,479.000 consumer units have incomes greater than $120,000 annually. For working purposes, let’s assume that none of them are younger than 25. There are 43,888,000 consumer units over 55. Their average income is substantially lower than the 25-55 group, according to the first CES chart. Let’s just estimate that about 2,479,000 consumer units over 55 have incomes greater than $120,,000, conveniently leaving 12 million in the group that has to cut its spending to increase its retirement income. Since this is a rough estimate, lets assume they are distributed ratably over the three cohorts. This will give a lower number than the actual number, because most likely the higher incomes are in the top two cohorts. Let’s assume everyone reduces spending by the same amount, which we will set at 9.7% to offset the lowering effect of the previous assumption. From there, thank you spreadsheet magic.