Debt Digest | Government Shutdown Is Likely
Links & Fiscal Facts
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Here are this week’s reading links and fiscal facts:
Savings accounts for children won’t solve Germany’s retirement system challenges. In the Financial Post, Canadian economist Jack Mintz highlights Germany’s new initiative: depositing €10 monthly into retirement accounts for children aged 6 to 18—locked until retirement. As Boccia and Nachkebia note in their new book, Reimagining Social Security: Global Lessons for Retirement Policy Changes, Germany has been more proactive than the United States in confronting demographic pressures. Still, its main program, the Statutory Pension Insurance, remains in bad financial shape, costing 9 percent of GDP (vs. 5 percent for US Social Security), with payroll taxes at 18.6 percent that only cover 70 percent of the program’s costs. The new initiative is unlikely to meaningfully address the program’s fiscal burdens. Cato’s Adam Michel has critiqued the Trump Accounts, and his arguments apply to the German initiative. “At best, government-funded accounts will transfer resources from current asset holders to younger Americans,” Michel explains. “The accounts do not create new savings; they merely shift resources from taxpayers and investors to account owners. It’s redistribution, not wealth creation.”
Americans today receive the highest historical amount of retirement income and Social Security benefits. Andrew Biggs of the American Enterprise Institute illustrates [see figure below] how much retirement income today’s seniors have. He explains: Since 1979, “average benefits paid out by private retirement plans increased over four-fold, from $5,300 to $24,600 per retiree household. Social Security benefits also increased, but only from $13,100 to $22,900.” Biggs is critical of the failing private retirement sector narrative, as “seniors are growing less reliant on Social Security, not more. The average income for seniors today is 2.5 times what it was in 1979, even after adjusting for inflation.” Social Security needs reform, as it currently transfers income to the wealthiest cohort of Americans. Boccia calls for “a fairer system that avoids excessively taxing younger, often poorer workers to fund extended retirements for older generations, who on average are much wealthier. Reforming Social Security to focus benefits on keeping seniors out of poverty, reducing benefits for higher earners, and slowing the growth in future benefits is crucial.” Andrew Biggs is speaking at our Social Security Event on October 30. [Register here]
An upcoming government shutdown is likely. Ryan Clancy gives seven reasons why in The Hill including, “August recess has compressed the timeline to strike a deal. When lawmakers return, they will have only 20 working days before the government runs out of funding at the end of September, drastically reducing negotiating time and raising the odds of brinkmanship.” Other reasons include, “Democrats are outraged over Republicans’ use of rescissions to claw back congressionally approved money,” “Republicans have their own escalating intraparty rifts,” and “we have a president who isn’t afraid of shutdowns”. Perhaps the most systemic issue is that “we have a broken budgeting process. This one is nothing new. 1997 was the last time Congress passed all 12 annual appropriations bills on time.” Boccia says the government shutdowns over discretionary spending are a distraction from the main debt issue: “America's biggest fiscal challenge lies in the unchecked growth of federal health care and old-age entitlement programs. Repeated shutdown fights and a slew of temporary continuing resolutions have gotten us no closer to reforming Social Security and Medicare.”
Liberation Day tariffs ruled unconstitutional. Ann E. Marimow reports in the New York Times: “A federal appeals court late last month invalidated President Trump’s most punishing global tariffs, finding that he had exceeded his authority by invoking a 1970s-era emergency power to tax imports from major trading partners. The appeals court paused its ruling, allowing the tariffs to remain in effect at least until Oct. 14 so Mr. Trump could file with the Supreme Court.” In last week’s Digest, we highlighted the CBO’s estimate of a $3.3 trillion tax hike over 10 years due to the tariffs. The President does not have the power to single-handedly raise taxes on the American people—especially to this extent. Marimow reiterates the court’s opinion, “The power of the purse (including the power to tax) belongs to Congress.”
Hurricane Katrina's final tab exposes the costs of emergency spending waste. Mark Bonner and Matthew Sander explain in the New York Times: “[The federal government] committed more than $140 billion toward the [New Orleans] recovery. Adjusted for inflation, that’s more than was spent on the post-World War II Marshall Plan to rebuild Europe or for the rebuilding of Lower Manhattan after the Sept. 11 attacks. It remains the largest post-disaster domestic recovery effort in U.S. history.” They continue, “Today, New Orleans is smaller, poorer and more unequal than before the storm. It hasn’t rebuilt a durable middle class and lacks basic services and a major economic engine outside of its storied tourism industry. […] [f]ederal dollars were funneled into a maze of state agencies and local governments with clashing priorities, vague metrics and near-zero accountability.” Unfortunately, lack of transparency seems to be a feature of emergency spending. As Lett and Boccia have written, “Congress has designated $12 trillion in spending for emergencies over the past 30 years […] We need greater transparency and more effective rules that hold legislators accountable to deter further misuse of emergency designations.”
