MinnEcon: July 16, 2010 Archive

The Great Recession and Social Social

Posted at 5:20 PM on July 16, 2010 by Chris Farrell (1 Comments)

From chief economics correspondent Chris Farrell

Eventually, the recovery will bring down the unemplpyment rate are incomes will start growing again. Problem is, the job and income effect of the great recession and anemic recovery will linger for years for many people.

For example, take young college graduates. It's been a tough job market for them. Studies suggest that the impact of entering the job market when unemployment is high can significantly depress their lifetime income. They get stuck for years in jobs that don't pay well and aren't commensurate with their education and abilities. Employers may also look at job applicants with spells of under-and-unemployment as damaged goods. The effects compound over time as poor job prospects and low incomes leads to less savings and lower rates of homeownership, and so on, in a vicious circle.

The financial trauma is also acute at the other end of the age spectrum. Considering the plunge in the stock market it isn't surprising that the incomes of those near retirement or in retirement suffer. But a sharp decline in the stock market in the years leading up to retirement is behind a modest cut in investment income a decade or so later. The impact is mainly confined to those in the top third of the income distribution. It's the slice of the population most likely to have a pension plan and own stock market assets.

The much bigger trauma from a downturn is on lower income households. No, they aren't typically shareholders. But a high unemployment rate around the time of retirement encourages many to apply for early Social Security benefits. You can apply for Social Security at age 62 and get a reduced benefit or get your full benefit if you wait until your full retirement age of 66. When jobs are scarce low income households often need the income from Social Security.

In Recessions, Reeling Markets, and Retiree Well-being, economists Courtney Coile and Phillip Levine of Wellesley College emphasize that it's mostly people in the bottom two-thirds of the income distribution that feel the pressure to apply. They estimate that an unemployed worker experiences roughly a 20 percent drip in their Social Security income. Their results suggest that "the problems that low-income older workers face when the labor market weakest are of greater concern than the problems that upper-income older workers when equity markets plunge," they write.

The effects of this bad economic climate will reverberate for years. But the biggest impact has been on low-income households and workers. The turn to Social Security early is just one more sign how difficult the economy has become for everyone except the well-off.

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