Government social benefits accounted for nearly 20 per cent—or 20 cents of every dollar—of Americans’ disposable income in March, a figure that’s been growing amid a weak economy, stubbornly high unemployment, and an ageing population.
As recently as the 1980s, that figure was closer to 12 or 13 per cent, according to the U.S. Bureau of Economic Analysis. “That [20 per cent] is a pretty big chunk of what people have as their disposable income,” says Chris Christopher, economist at IHS Global Insight.
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Government benefits—also called transfer payments—are made to citizens by federal, state, and local governments through programs such as Social Security, Medicare, unemployment insurance, and disability insurance.
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Not surprisingly, the recession has further accelerated Americans’ dependence on government transfer payments. In this sputtering job market, many Americans are getting most, if not all, of their income from unemployment benefits. “The economy has been weak for the last three or four years, so more people are collecting unemployment benefits, and they’re collecting them for longer,” says Russ Koesterich, iShares global chief investment strategist and author of The 10 Trillion Dollar Gamble.
While the Great Recession can be blamed for the relatively recent spike in transfer payments as a proportion of disposable income, it doesn’t account for the general upward trend seen since the late 1950s, the earliest data available from the Bureau of Economic Analysis. In January 1959, government social benefits accounted for about 6.7 per cent of disposable income, on average. 20 years later, that figure jumped to almost 13 per cent.
An ageing populace has a lot to do with the overall surge in the level of transfer payments, experts say. As the baby boomers age and retire, a larger proportion of the population will receive Social Security benefits and Medicare coverage, programs that are getting increasingly expensive to fund.
If the economy fails to improve as quickly as economists hope, dependence on government support could increase even more, says Christopher, with transfer payments possibly breaching 22 or 23 per cent of Americans’ disposable income. “There are so many things that play a role in this, but as a percentage of disposable income, [transfer payments] aren’t going down,” he says. “If the economy doesn’t keep getting better, especially on the employment front, things could get a lot worse.”
While Americans are more dependent on the government than they were 20 or 30 years ago, how and when to wean consumers off government subsidies is a complex and delicate matter. “You still have a fairly fragile consumer, largely because of the labour market,” Koesterich says. A host of other headwinds confront Americans as well. For hourly workers, wages are growing below the rate of inflation and many consumers are still carrying far too much debt relative to their incomes, he says. And no one needs to be reminded that gasoline prices are rising.
“The key point is that you’re somewhat restricted in the short term with how much you want to be cutting back on spending given this dependency,” Koesterich says.
Spending more on entitlements might be a tough pill to swallow for taxpayers, who are already saddled with trillions of dollars in government debt, but experts fear sharp cuts could derail economic growth. But, budget battles in Washington and the looming debt ceiling have underscored the need to cut government spending and get the national debt under control. Add to that worries that bond investors could start demanding higher interest rates on treasury bills and the future of government social benefits is murky, at best.
“The paradox is that long term, it’s not sustainable,” Koesterich says. “But in the short term, how do you get out of this without creating yet another headwind for the U.S. consumer?”