Debt Digest | Americans Are In for Social Security Sticker Shock
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Postponing Social Security reforms will only exacerbate its problems. Mercatus Center’s Charles Blahous, who has previously served as a public trustee for Social Security, warns: “Unless the leaders of both major political parties pivot rapidly from evading the problem to tackling it, Social Security will not survive in its current form.” Blahous is also skeptical of funding Social Security through payroll tax hikes, stating: “There will be substantial sticker shock from the electorate when they realize how large the necessary tax increases are, and how much of the problem they would still leave unsolved. This dynamic would expand acceptance of the reality that cost constraints will be required.” There are various cost-cutting reforms that can put Social Security on a sustainable path without increasing taxes on American workers. For more on that, see our latest Social Security fact sheet.
Reduce benefits for high-earners instead of hiking their taxes. A recent Washington Post article covered the annual report from the Social Security trustees, which projects a 21 percent benefit cut for all beneficiaries within this decade. I stand by my quote as one proposal to address the program's funding shortfall: “Romina Boccia, an economist at the libertarian Cato Institute who focuses on entitlement programs, argues for cutting benefits for high earners with healthy retirement savings, rather than hiking taxes. ‘People don’t just continue to pay taxes,’ she said. ‘They will work less. They will find creative ways of earning income that is not taxed as earned income.’” As I have previously written, Social Security pays overly generous benefits for high-income beneficiaries, with the highest-earning couples able to collect $117,000 per year. This far exceeds the retiree benefits of other OECD countries, such as Canada, the UK, and New Zealand. For more on this, see here.
The government now spends more on interest costs than on defense and Medicare. According to the Committee for a Responsible Federal Budget (CRFB), “In the first seven months of Fiscal Year (FY) 2024, spending on net interest has reached $514 billion, surpassing spending on both national defense ($498 billion) and Medicare ($465 billion). Overall spending has totaled $3.9 trillion thus far. Spending on interest is also more than all the money spent this year on veterans, education, and transportation combined [see the figure below].” Despite the increasing burden of interest costs, they are too often overlooked in cost estimates of new spending and tax bills. As Dominik Lett and I argue, “As interest costs make up a larger share of the federal budget, policymakers will be forced to choose between paying interest on the debt and providing funding for other critical spending priorities, such as national defense and public health.” That time is now.
Improve congressional scorekeeping. The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) play crucial roles in informing legislators on the fiscal costs of new policies. However, a critical gap in their analysis is the routine exclusion of debt service costs. Because Congress does not usually ask CBO and JCT to account for interest costs, legislators and the public underestimate the long-term impacts of deficit spending. In fiscal year 2024, interest costs alone surpassed national defense spending, underscoring the urgency of reining in the rapid growth of the national debt. The Cost Estimates Improvement Act (H.R.8341) would make congressional scorekeeping more accurate by mandating that CBO and JCT cost estimates include interest costs. Establishing a more realistic, accurate understanding of the cost of fiscal policy choices is a critical step in improving the fiscal outlook.
Congress should rein in administrative spending. Article I provides Congress with the ‘power of the purse,’ vesting the legislative branch with the responsibility to provide appropriations. However, Presidents have increasingly used executive actions to run up federal deficits at the taxpayers’ expense. Take the Biden administration’s efforts to unilaterally provide student debt relief. According to the Committee for a Responsible Federal Budget, the administration’s student debt cancellation policies will cost $870 billion to $1.4 trillion. Such large spending decisions should be made by Congress, not the executive. The Strengthening Administrative PAYGO Act of 2024 (H.R.8195), introduced by Jack Bergman (R-MI) and Chairman Jodey Arrington (R-TX), would clarify and strengthen the requirement that the administration offset the costs of new executive actions that increase mandatory spending by more than $1 billion over 10 years or $100 million annually. Reining in excessive executive spending is one key step to putting the US back on a responsible fiscal path. Note to Congress: offsetting new emergency spending should also be on the agenda!