New King University study: Transfer payments a large and growing part of SW Va economy
By Scott Robertson
One of the most basic ideas of a capitalist economy is that individuals’ income will come from wages and salaries, paid by employers based on the value of the work the employees do, as determined by the marketplace. In Southwest Virginia today, that capitalist ideal is far from the only reality. In fact, in a region that has lost one of its primary economic drivers, tobacco, and is losing the other, coal, the percentage of income derived from wages and salaries is shrinking while the percentage of income from transfer payments from Social Security and medical programs grows. A study to be released this month by King University’s King Institute for Regional Economic Studies (KIRES) entitled “Regional Economic Impacts of Social Security Benefits and other Government Transfer Payment Programs,” says in 2014 the share of total personal income attributable to earned income had fallen to 50 percent in Southwest Virginia.
The report was prepared by Dr. Sam Evans and Dr. William Teng, both of the School of Business and Economics at the university. Evans is associate professor of Economics and Finance and director of KIRES; Teng is professor of Economics and Finance. “We were surprised at the amounts we found,” Evans said of the research behind the report.
“The thing I find disturbing – and we have done several reports on the economic impact of coal mining on the region – is that when you take a coal mining job away, you take about $150,000 income out of the region when you consider all the multipliers. And we have had this decline in coal production and the related rise in unemployment. So we have seen a 17 percent drop in earned income from 2011-2014. At the same time, the transfer payments keep trending up.”
It is troubling, Evans says, that in 2014, the last year for which statistics have been released, for every dollar of earned income in Southwest Virginia – wages and salaries, there were 71 cents in transfer payments. “That number was around 50 cents for the Tri-Cities overall, and both of those numbers are well above the U.S. number, which is around 27 cents,” Evans said.
Evans and Teng note in the report that, “Over the past several decades there has been a pronounced shift in the composition of personal income in the United States and in the regional economy – Tri-Cities metro area and the Southwest Virginia coalfield region. A half-century ago, earned income accounted for 75 – 80 percent of total personal income. By 2014, the share of total personal income attributable to earned income had fallen to 57 percent in the Tri-Cities and 50 percent in Southwest Virginia.” The report states that “accompanying this decline in earned income share was steady growth in the share of total personal income attributable to government transfer payments.”
According to Evans, “Transfer payments constitute a basic industry, and like other basic industries, such as manufacturing, tourism, and mining, transfer payment programs bring outside money into the regional economy. Transfer payments, therefore, have an impact on job creation and income growth in the region.”
“Those activities that have the greatest economic impact are activities that bring in money from outside the region,” Evans added. “The transfer payments are money from outside the region. In terms of impact, transfer payments are almost like tourism on steroids. It’s outside money, but whereas tourists spend money at restaurants and places where the direct impact is pretty low, the residents of the region spend their money on a broad range of things from groceries to health care to financial services and utilities. So it has a much bigger impact than tourism.” Evans noted the King study does not address the net impact of payments into Social Security and other government programs from the region.
While most leaders would prefer to replace coal income with other earned income, a previous KIRES study found it will be hard to make that happen. “We found that it takes about two manufacturing jobs to replace a coal job,” Evans said. “When you get into the service sectors like retail, it takes five to six jobs to replace one coal job. So it’s pretty obvious that to replace coal in terms of economic impact, you need some sort of manufacturing industry.”
Residents of the Tri-Cities received nearly $5 billion in government transfer payments in 2014, 28 percent of the region’s total personal income of $18 billion. Medical benefits and Social Security benefits combined accounted for 80 percent of transfer payments.
Residents of the Southwest Virginia coalfield region received nearly $2 billion in government transfer payments in 2014, 36 percent of the region’s total personal income of $5.5 billion. Medical benefits and Social Security benefits combined accounted for 78 percent of government transfer payments.
The study examined trends in personal income and the major components of income over the 2000 – 2014 period and found that total real personal income in the Tri-Cities rose 23 percent over the period. This growth was boosted by a 77 percent gain in government transfer payments as rapidly increasing health care costs fueled an 88 percent increase in medical transfer payments; Social Security benefits rose 66 percent.
Total real personal income in the Southwest Virginia coalfield region rose 16 percent over the 2000 – 2014 period. Growth in real income was led by a 39 percent gain in government transfer payments. As was true for the Tri-Cities, the growth in real government transfer payments was marked by gains in medical payments and Social Security benefits – 60 percent and 37 percent, respectively.
Evans notes that, “We have a particular interest in examining the economic impact of Social Security benefits because they are a dependable and predictable source of income for the local economy. Social Security benefits are not measurably affected by the business cycle, and because benefits are indexed to inflation, they have a stabilizing effect on income in inflationary periods.”
“So if we look to the future,” Evans added, “if those trends continue in Southwest Virginia and the Tri-Cities metro area, the trend increase in the Tri-Cities is about $78 million into the region. That translates to about 575-600 jobs when we do the multiplier analysis. In Southwest Virginia, that’s much lower, only about 125 jobs.”
The authors found that over the period from 2000-2014, total Social Security benefits paid to recipients in the Tri-Cities increased $78.6 million per year; for Southwest Virginia, the annual increase in benefits was $24.7 million.
The number of Social Security beneficiaries in the Tri-Cities metro area as of Dec. 2014 was 141,120, including 83,715 retired workers. Total Social Security benefits received by all recipients totaled $1.95 billion in 2014. The number of beneficiaries in the Southwest Virginia coalfield region was 56,740 as of Dec. 2014, including 23,410 retired workers and 17,250 disabled workers. Social Security benefits paid to all recipients totaled $761 million in 2014.
If there is a silver lining to the findings in the report, Teng said, it is that the figures could spur action. “This report, along with previous ones, can provide policymakers something to look at. For instance, it’s pretty clear that to replace the impact of the coal industry, we need to establish new industries, particularly manufacturing. We hope the policymakers can see in these reports something concrete they can use to help do that.”