Tuesday, October 06, 2009

The Rush for Money from Somewhere Other Than Work

As jobs dry up, people are rushing to find some other source of income.

Both statistically and anecdotally, a rush to tap non-wage sources of income is underway. While shopping in an old-line hardware store slated for closure, the clerk assisting us noted as an aside, "I'm 62, so I can retire." He is not alone, as correspondent Craig M. sent in this story describing a leap in Social Security applications: Social Security Applications Almost Double Because of Recession

Applications for Social Security benefits rose almost 50 percent more than expected this year because of the recession, according to the federal retirement program.

“We are seeing a significant increase in both retirement and disability applications as a result of the recession,” said Mark Lassiter, a Social Security spokesman.

The 150,000 extra retirees may add to the financial pressure on the entitlement program. In May, Social Security trustees said expenses would exceed revenue beginning in 2016, one year earlier than their previous forecast.

The Social Security Administration had projected an increase of 315,000 applicants for the 12 months ending Sept. 30 partly because the first baby boomers -- those born right after World War II -- are starting to retire.

The actual increase was higher. Agency statistics show that 2.57 million people requested benefits, up from the 2.10 million applications received during the previous 12 months. That’s an increase of 465,000, or 47 percent higher than the expected rise.

Another standard source of non-wage income is disability and workers compensation. Social Security is receiving more applications for disability, and at least anecdotally there is some evidence that people about to get laid off are attempting to tap the workers compensation system as a backup source of income, in effect saving their unemployment insurance. Filing a "stress claim" just prior to being laid off freezes the worker's employment status: they remain employed but are not costing the employer wages.

Eventually, the workers compensation fund paid by employers is depleted and the rates employers pay into the system will rise--but as a stopgap, an injury or stress claim relieves both employer and employee.

This being a litigious society, I suspect there is a rise in employment-related lawsuits. One of our friends who operates a small restaurant was just served with a lawsuit on behalf of two former kitchen employees who were demanding $5,000 because they hadn't been given proper morning and afternoon breaks.

Regardless of the merits of the case--dubious, as it is basically a case with no evidence one way or the other-- the timing is suspicious as the former employees are out of work.

Desperation drives people to do all sorts of unsavory things and given the common knowledge that it's cheaper to settle a lawsuit rather than litigate it, nuisance/extortion lawsuits can be expected to rise in hard times.

All these sources of non-wage income are not limitless. The more people who tap Social Security, the sooner the fund will require income tax revenues to cover its expenses. The more people who tap workers compensation funds, the more the employers' payments into the system will rise. The greater the number of small businesses slapped with what amounts to extortion lawsuits, the greater the number of businesses who call it quits and close their doors.

There is a saying in small business in response to these kinds of situations: "Here's the keys, payday's on Friday." In other words--you want this business, fine, here's the keys; you make payroll on Friday and see how much the business is worth.

Though the Bureau of Labor Statistics doesn't track how many small businesses fold every month (at least to my knowledge), I suspect the number is stupendous. Yes, there is the fantasy "birth/death of businesses" number, but the notion that small businesses are springing up in the tens of thousands and surviving, much less prospering, in this economy is patently absurd.

The pressures on small business form a positive feedback loop: as workers comp rates and other taxes/fees rise, more small businesses slip into insolvency and close, laying off even more workers who then seek to tap non-wage sources of income, further pressuring Social Security and disability funds, which must then be replenished via higher taxes on small businesses. That feedback will continue to strengthen in the years to come, deepening the recession and loss of jobs and income.

Permanent link: The Rush for Money from Somewhere Other Than Work

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

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