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Support Social Security to reduce risk of recession: Larry Summers

Written by Diane Archer

In a recent talk for the Brookings Institute’s Hamilton Project and a subsequent opinion piece in the Washington Post, Lawrence Summers speaks to how to address the real risk (better than 50-50 chance) of a U.S. recession in the next few years. He makes a compelling case that we need to speed up the pace of economic growth. And, he argues that we should support Social Security to reduce the risk of a recession.

In brief, Summers says that current economic forecasts indicate that our economy is likely to perform as poorly in the 11 years between 2007 and 2018 as it did in the 11 years between 1929 and 1940. Fiscal policy, increasing demand to permit growth that is sustainable financially, is a tool for stabilizing the economy. Monetary policy is not a viable option; the Federal Reserve will not be able to lower interest rates the standard 4-5 percent, to address recessionary risks, given that interest rates already are so low.

We need to invest in infrastructure, which will both create more jobs and increase demand. We need to invest in housing, particularly residential investment. And, we need to support Social Security. Summers emphasizes that “social security is good economics when, as at present, the growth rate far exceeds the government borrowing rate. Further it raises demand without enlarging government deficits.”

Put differently, expanding Social Security benefits, even through greater payroll contributions, will tend to reduce the need for savings and help to stimulate economic growth.

Social Security is also helpful in stabilizing the economy during a recessionary period because it gives older workers a guaranteed income–not linked to the stock market or the nation’s economic health–allowing them to retire if they choose or lose their jobs. Private retirement plans, such as 401(k) plans, in contrast, tend to exacerbate economic downturns; older workers are hard pressed to retire when the value of their 401(k) plan plummets and face increased risk, with less in savings, if they lose their jobs.

Moreover, expanding Social Security would help address our retirement income crisis. Click here to let Congress know that we need to expand Social Security.

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