Unemployment, Social Security and Retirement Age: James K. Galbraith

Several weeks ago I wrote an article titled Dealing with Social Security, Deficits, and an Aging Population. In it, I bemoaned the fact that there did not appear to be any innovative thinking regarding the indicated problems. That has changed, with a few interesting ideas now appearing in print. Here we will discuss a proposal from James K. Galbraith from an article in The American Prospect: Early Retirement as a Fix for Unemployment. In my previous post I questioned the wisdom of enforcing a greater retirement age at a time when there would always be high residual unemployment. Galbraith cemented his reputation as a prescient and innovative thinker by agreeing with me—sort of.



Some authors have taken to referring to the recent recession as the Great Recession in order to remind us how close we came to the Great Depression. Being an independent thinker, Galbraith uses the term “Great Crisis.” This term conveys the notion that the effect on society transcends that of a mere recession, and that a different level of response is required.

“Debate over the future of Social Security and Medicare usually takes place in a timeless cocoon, insulated from other programs and economic forces, an economic neverland in which the Great Crisis either did not happen or has safely passed without lasting effect. This is explicit in the forecasts of the Congressional Budget Office, which habitually foresee full employment returning within five years, whatever the starting point. The CBO approach is like that of a doctor with only one patient: On observing that the patient has always recovered in the past, the doctor infers that the patient must, therefore, be immortal.”

“In the real world, we have suffered an economic calamity, and whether we recover from it fully or at all depends on the steps we take -- or fail to take -- right now. Social Security and Medicare can be part of that solution -- but not by cutting them to reduce the deficit. Rather, we should expand their eligibility to help those who suffered most from the calamity -- while also improving opportunities for other people looking for jobs.”

I had suggested infrastructure work driven by the need to respond to climate change would be a big driver towards greater employment in the future. That would be coupled with a remake of our healthcare system along the lines suggested by Atul Gawande’s writings (Medical “Hot Spots” and the Future of Healthcare). This envisages less money flowing to doctors, hospitals, and drug companies, and more being used to create numerous positions as nurses, home health advisors.... Galbraith is thinking along the same lines.

“We face the challenges of energy security and climate change. Some of the work required involves scientific, engineering, design, and planning talent. Much does not. Large parts of the conservation and mitigation task are matters of weatherizing buildings, tuning engines, reforesting land, constructing seawalls and levees, and similar semiskilled (though often technically demanding) tasks. Much will be in construction and reconstruction of infrastructure, engineered for energy saving and reducing greenhouse-gas emissions. All of this could provide jobs if the right institutions for planning, funding, and execution can be built.”

“Another area of clear need relates to our aging population. As people get older, they need care, and the proportion of the working population employed in providing it must rise. Further, training is necessary, and standards must be imposed, maintained, and enforced. This is the opportunity to create a large, labor-intensive, mainly not-for-profit sector, that would employ workers with relatively nontechnical backgrounds and help the elderly live in independence and comfort for as long as possible. Again, realizing this goal will require new institutions or stronger versions of institutions that already exist.”

While Galbraith does not indicate that long term elevated unemployment is going to be the norm, he justifies an extreme measure by stating that the job loss over the last ten years was so severe that standard approaches will not be adequate to address it. He is particularly worried about the prospects of older workers who have lost their jobs.

“Subjecting these older workers to the requirement that they search for jobs that don't exist in order to qualify for unemployment insurance is a debilitating waste of their time and effort.”

“Further, many older people are still working, despite the fact that their work is physically uncomfortable or even painful. They work because they need the income. They work because they want to hold out to get their full Social Security benefit, which may be their only source of retirement income, and because they need health insurance before they reach the Medicare eligibility age. Meanwhile, younger workers, with fresh skills and ambitions, wait for positions to open. And they wait. It's a bad bargain for both groups.”

“What the country needs is a massive shift in the labor market, to better match the workforce that we actually have to the diminished pool of jobs.”

His solution is a temporary lowering of the Social Security retirement age and the age for Medicare eligibility.

“Let Congress enact a three-year window during which full (or nearly full) Social Security benefits could be obtained by anyone retiring at the age of 62. Let Medicare be fully available to those who take this option. The ages, dates, and precise structure of the incentive can be tinkered with as conditions and response rates dictate; for now, it's the principle that matters.”

“The principle is: Those for whom earlier retirement is attractive, but not quite financially viable, should get a strong incentive to take it now. The decision to do so would be voluntary; no one who wanted to work would be forced out. Employers could, of course, offer counterincentives to workers they'd like to keep on. The policy would invite departures from the labor force. Those who wanted out could get out. It would thus open positions for those workers -- mostly younger -- who have the greatest need for jobs and who have suffered the gravest harm, early in their work lives, from being unable to find steady work. The unemployment rate would fall.”

The big issue with this sort of proposal is the cost issue. While the early retirement generates a cost, the emptying of the unemployment rolls represents a savings—several savings, in fact.

“Would this proposal cost money? There would be some offsets, from higher payroll taxes on higher wages, from reduced unemployment-insurance payments, and from reduced (private sector) medical bills. In general, though, of course it would cost money. (The exact amount would depend on how many took up the offer -- something we can't easily predict.) There is no cost-free solution to our jobs crisis. It would also make us a happier people, which is something worth spending money on. Indeed, I can think of no other proposal that might so effectively deal with our present miseries as quickly and fully as this one.”

It is a shame that he did not make a quantitative attempt at the cost issue. Without that effort it is hard to generate credibility. The man is a professor at a major university. He must be surrounded by unemployable graduate students looking for work. This type of study would have produced an excellent academic paper, received a NYTimes write-up, and perhaps even made mention on prestigious blogs. Hopefully, someone is back on campus working on it.