Cutting off stimulus checks to Americans earning over $75,000 could be wise, new data suggests
Stimulus checks to couples earning more than $75,000 and singles earning more than $50,000 only spend about 7 percent of that money, choosing to save the rest.
As President Biden pushes for another round of stimulus payments for most Americans, calls are escalating to target the aid solely to low- and moderate-income families, and new data suggests that would provide the most needed and effective boost for the economy.
Families earning under about $75,000 typically spend the money quickly, according to a new analysis of how Americans are using the $600 economic impact payments this month by Opportunity Insights, a nonprofit research organization. Families earning above that threshold typically save the stimulus payment, which provides little help to the overall economy and signals the money was not as urgently needed.
Lawmakers from both parties lobbied the White House over the weekend for a less costly relief package that would only send stimulus payments to the most needy. Under Biden’s proposal, the vast majority of U.S. households would receive $1,400 payments.
“Targeting the stimulus payments to lower-income households would both better support the households most in need and provide a large boost to the economy in the short-run,” said John Friedman, an economics professor at Brown University and co-director of Opportunity Insights. “These checks are really impactful for lower-income households.”
Friedman, Harvard economics professor Raj Chetty and economist Michael Stepner analyzed credit and debit card spending data and found a clear uptick in spending for families and individuals who earn less than about $50,000 after the stimulus payments started to widely hit bank accounts on Jan. 4. In contrast, spending barely moved at all for families and individuals earning over $78,000.
The price tag to send another round of checks to couples earning more than $75,000 and singles earning more than $50,000 would be $200 billion, yet the researchers estimate this group is only likely to spend $15 billion of that money — about 7 percent.
The initial round of $1,200 stimulus checks in the spring saw some increase in spending across all income levels, Friedman and Chetty say, but this second stimulus is revealing a wide gap. That’s likely because the recession is largely over for the rich, while poorer households are still deep in a recession. The Federal Reserve says unemployment for low-wage workers is still hovering around 20 percent — a near depression-like state.
“We’re seeing a pretty similar effect in how low-income households spent the stimulus in the first and second rounds and a smaller spending impact for high-income households,” said Friedman. “Low-income households have suffered by far the biggest economic shock. They need the help the most.”
Their findings are backed up by other surveys and analyses of how people used their first stimulus payments. The U.S. Census found households with incomes between $75,000 and $100,000 “were more likely to use their stimulus payments to pay off debt or to add to savings, compared to households overall.” In contrast, nearly 88 percent of households with less than $25,000 intended to spend the stimulus.
The covid-19 recession is the most unequal in U.S. history
Andrew Rafner, 32, has been unemployed since mid-March in Los Angeles. A comic book aficionado, Rafner worked at a comic book store where dozens of customers became friends. Rafner and his girlfriend have struggled to pay bills at times. The stimulus check he just received was a lifeline for food and rent.
“It’s been nice to go to grocery store and not really have to worry about what to eat,” Rafner said.
Many Republicans in Congress have suggested that another round of stimulus checks is not necessary and would raise the national debt. The Biden Administration argues spending and employment data both show that many lower income families remain in precarious situations.
Netspend, a prepaid debit card company, said it processed more than $850 million stimulus payments in January for about 900,000 customers. Prepaid debit card users tend to be lower income, and Netspend confirmed that most of the money has been spent rapidly for basic necessities like food and gas.
“For the first and second round of individual stimulus payments, Netspend saw its customers spend funds quickly. Consistent with the first round of individual stimulus payments, these customers are using their funds to make purchases at grocery stores, restaurants, pharmacies and gas stations,” said Netspend spokesman Adam Dawes.
Some economists and lawmakers say the government would be better off expanding unemployment for people out of work rather than sending out another round of checks.
But economists like Claudia Sahm say too many people are slipping through the cracks in the unemployment system or have kept their jobs but are making less money now.
Betty Laribo is a nurse’s aide in Morgantown, W. Va. Before the pandemic hit, she was working “per diem” and had no trouble getting booked as many days as she wanted at different health care facilities that needed extra help. Now she says she is lucky to get a single day’s work every two weeks.
As a single mom of four kids who are all currently in virtual schooling, Laribo is doing what she can to get by. She had fallen three months behind on her car payment and was worried about losing it until her stimulus payment arrived on Friday.
“I paid my rent, my car payment and got groceries for the house and a few fun things for my kids,” said Laribo, a military veteran. “A lot of us are still working, but our hours have been so drastically affected by covid that we might as well be unemployed.”
Laribo said it “boggles her mind” that people earning as much as $75,000 a year were receiving the same stimulus payment that she was.
Eligibility details for a proposed third round of payments have not been worked out yet, but individuals earning up to $87,000 a year and married couples earning up to $174,000 a year received at least some money in the second round of stimulus payments that Congress passed over the holidays. Close to 160 million households are expected to get a payment. Some people are still waiting for a check in the mail.
Some people who received a payment in January have posted on social media that they did not need the money and are donating it to charity.
“Stimulus checks arrived, time for a big food bank donation,” tweeted one woman last week.
But data indicates most people who did not need the money right away are saving the stimulus payments or using them to pay off student loan, credit card or mortgage debt.
