Does Social Security Serve as an Economic Stabilizer?

WP#2021-9

Abstract

In times of economic distress, both individuals and localities can benefit from stable sources of income.  While a large literature documents the benefits that individuals enjoy from guaranteed income such as Social Security, less attention has been given to the stabilizing force of Social Security at the community level.  Intuitively, if many people are insulated from recessions through stable Social Security income, they will continue to demand local goods and services, propping up local employment and earnings.  This paper uses the American Community Survey to estimate the extent to which Social Security benefits stabilize local economies, by examining how the relationship between a county’s economic outcomes and those of its surrounding counties vary with the share of county income from Social Security.

The paper found that:

  • Earnings and employment fluctuations in counties with larger shares of income from Social Security were less correlated with the state’s unemployment rate than counties where Social Security made up a small share of income.
  • In counties with more Social Security income, employment and earnings in industries that sell locally were also less correlated with the state’s unemployment rate.

 
The policy implications of the findings are:

  • Social Security may be valuable as a stabilizer for the local economy, above and beyond its direct value to beneficiaries.
  • Therefore, changes to benefit generosity and structure may have implications for the robustness of local labor markets, particularly in industries that cater to local demand.

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