Consumer Spending Increases

Despite the expiration of the payroll tax cut and the increase on Social Security taxes that began on the start of the new year, The New York Times reports that consumer spending rose by about 0.2% in March. According to the federal government, the increase that took place between January and March marks the fastest increase in consumer spending for over two years. This increase is partially due to the fact that March was unusually cold, leading American’s to spend more for heating. Thus it is important to note that although an increase in consumer spending is typically good, an increase which is the result of spending more on utilities does not necessarily indicate higher consumer confidence. Spending on other things, such as clothes, cars, household goods, and furniture would be more indicate of this. However, there is some room for optimism. The Commerce Department claims that the economy grew by 2.5% during the January-March quarter. This was 6 times higher than the rate recorded for the fourth quarter. Although this grow rate would be considered optimal in an economy with low unemployment, during a struggling economy this growth rate is not high enough to diminish unemployment.

Although taxes have increased, many believe this uptick in consumer spending could continue since American’s have reduced their personal debt, their home values have likely risen, and their stocks enjoyed some success further adding to their household wealth.

Since the recession officially ended in June 2009, growth has been weaker than usual after a severe downturn. The economy expanded just 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012.

Southern States Participate Most in Social Welfare Programs

A previous Data in the News postfocused on the rising participation rate in means-tested assistance programs, and an interactive map on The New York Times website this week displayed the geographic distribution of government benefits.  Welfare programs accounted for 17.6% of personal income in 2009, the highest in history.  In 1929, total entitlements accounted for just 1% of Americans’ incomes, but with the expansion of Social Security, the initiation of Medicare and many other government programs, and the overall growth in entitlement spending, the share of income via welfare programs has risen substantially.  

And while all regions have experienced a greater flow of government benefits to their residents, states in the South and in the western portion of the Sun Belt have seen their dependence on government welfare programs rise the most.  States such as Alabama, Mississippi, Kentucky, Arizona, New Mexico and Tennessee possess many counties with a high level of dependence on government benefits; some counties have a level of transfer income per capita of over $10,000.

One Third of American Nonretirees Expect Social Security to be Major Source of Retirement Funding

Gallup reports that 33% of American nonretirees predict Social Security will be a major source of retirement funding.  This percentage has increased since the recession; in 2007, 27% believed Social Security would prove vital to their retirement fund.  57% of retirees depend on Social Security as a major source of income, while only 33% of retirees rely on a work-sponsored pension plan.  In addition, nonretirees are more likely than retirees to utilize a retirement account (46% to 24% respectively) – such as a 401(k) or an IRA – to be the major source of funding their retirement.  This percentage has decreased six points since the recession.  Gallup’s Chief Economist, Dennis Jacobe, believes stock and retirement losses have led to many of these trends.  Also noteworthy is the fact that 38% of nonretirees expect to retire comfortably – a new low.

Economic Implications of an Aging China

The Economist recently published an article exploring the economic implications of the declining fertility rate in China. The fertility rate in China has declined sharply in the past 30 years, from 2.6 to 1.56. Additionally, the elderly population continues to rise; it is projected that by 2050, 26% of China's population will be over 65. This trend will have broad and severe consequences for the country. Similar to the social security crisis happening in America (in which it is projected that there will not be enough individuals in the work force to pay for the pensions of elderly Americans), China will be facing a similar problem but on a much larger scale. Additionally, with China’s one-child policy, the country will face a “4-2-1-phenomenon”, in which one child must take care of four grandparents in addition to their two parents. With most individuals lacking the financial resources to shoulder this heavy burden, the elderly will have to rely on social security pensions, a system that is already in peril.

Economic Recovery and Medicare's Weakening Prospects

The Medicare trustees' annual report has set off another series of heated political debate about President Obama's health care law, as the program's estimated expiration date was announced to be 2024, five years earlier than was projected last year. The report suggested that the cause of the earlier expected date for the exhaustion of Medicare's funds was the lagging economy. According to a New York Times article on the report, "Payroll tax revenues, which provide most of the money for Medicare’s hospital insurance trust fund, were lower than expected last year because earnings were 'considerably lower than projected' and the economy was weaker than expected."
Robert Pear of the Times also commented: "The estimates...were immediately swept up into the already inflamed political battle over federal spending, debt and the future of entitlement programs," with Republicans insisting that the report showed the urgent need to shore up the finances of the Medicare program and with Democrats insisting that damage would have been worse if not for Obama's health care law.

Medicare and the Social Security program-- which moved its exhaustion date up one year, to 2036--together account for over one-third of federal spending. According to Pear, "It is inconceivable that politicians would allow either program to run out of money." However, the two public trustees, Charles P. Blahous III and Robert D. Reischauer, cautioned: “The financial shortfalls confronting both Social Security and Medicare are substantial and—absent legislation to correct them—quite certain.”

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Galveston Model for Social Security

On today's Glenn Beck program, Glenn highlights a fantastic alternative approach to Social Security called the "Galveston Plan":



In doing further research on this plan, we discovered that three Gulf-of-Mexico counties near Houston (Galveston, Brazoria, and Matagorda) opted out of the Federal Social Security plan for their county workers just before such an option was closed with the 1983 Social Security reforms.

In 2005, the National Center for Policy Analysis gave a thorough analysis of the results of this program and found it to be highly successful; we highly recommend the reading. "Workers' contributions were put into conservative fixed-rate guaranteed annuities, rather than fluctuating stocks, bonds or mutual funds" yielding an impressive 6.5% annualized yield over 24 years (and much higher than the Federal Gov't as shown in the Beck video above).

With such a successful program, we are left wondering why we are stuck with such an awful leviathan that Social Security is today and what we can do to start such a program in our own county--not only for public workers but for private ones as well.