Debt Digest | Hundreds of Billions of Taxpayers’ Money is Squandered on Improper Payments
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Raise the retirement age. “One nation that’s rethought retirement is the Netherlands. In order to keep their state pension affordable, the Dutch decided more than 10 years ago to gradually raise the retirement age. It will now automatically adjust as the country’s life expectancy changes. Obviously, implementing this policy elsewhere would be a massive political undertaking. But my point is that we should start having the conversation. When people are regularly living past 90, what should the average retirement age be?” wrote Larry Fink, the CEO of BlackRock in his annual letter to investors. “[In the Netherlands] the savings on retirement benefits and the increase in tax revenues from greater work activity led to a significant net fiscal gain for the government,” explains Mark Warshawsky from the American Enterprise Institute. Given the benefits of raising the retirement age, Boccia has previously suggested: “Congress should raise the early and full Social Security eligibility ages by 3 years each (to 65 and 70) and index both to increases in longevity.”
Lessons from Jamaica’s debt reduction. Jamaica successfully halved its debt ratio from 144% of GDP in 2012 to 72% in 2023. A paper examining this case attributes Jamaica’s success to adopting measures in 2010 that “required the minister of finance, by the end of the financial year 2016, to reduce the budget deficit to zero, the debt-to-GDP ratio to 100%, and public-sector wages as a share of GDP to 9%.” The paper authors also acknowledge a reduction in political polarization as a crucial factor in Jamaica’s debt reduction, leading them to conclude: “[Our] observations [...] leave us concerned about the scope for sustained fiscal consolidation in large countries like the United States with high levels of political polarization.” Boccia suggests that a BRAC-like fiscal commission, composed of independent experts, and designed to stabilize the US federal debt, could overcome political obstacles to implementing effective fiscal reforms. For more on this, see here and here.
Rising fiscal pressure challenges central banks’ ability to control inflation. “Globalization, market liberalization, and other factors that helped reduce inflation in the four decades before the COVID-19 pandemic may be reversing,” suggest Hassan Afrouzi, Marina Halac, Kenneth Rogoff, and Pierre Yared in a new paper. One challenge the authors identify is rising fiscal pressures owing to the “expansion of entitlement spending without commensurable revenue increases.” Net zero emission targets, geopolitical tensions, and new industrial policy could worsen fiscal pressures by pushing spending to new heights. Together, “increased fiscal pressures result in higher monetary stimulus: the central bank experiences pressure to use inflation to devalue outstanding public debt and to stimulate the economy to reduce the real interest rate and the cost of issuing new debt.” For more on the risks of using fiscal quantitative easing, check out The Menace of Fiscal QE by Cato’s George Selgin.
Hundreds of billions of taxpayers’ money is squandered on improper payments. According to the Government Accountability Office (GAO), federal agencies reported $236 billion in improper payments in fiscal year 2023. Around $114 billion of the total is attributed to Medicare, Medicaid, and the Social Security Administration’s OASDI and SSI programs. Rachel Greszler from the Heritage Foundation pointed out that an expanding government leads to a growth in improper payments. “Ensuring the accuracy and expediency of federal payments is not an easy task as the two goals often run counter to one another. This is one reason why federal tax and transfer programs are inherently less efficient than individuals keeping more of their own earnings and being able to spend them without jumping through necessary but bureaucratic hoops,” stated Greszler.
Traditional budget processes fail to address today's debt crisis. “Americans must recognize that the budget process adopted half a century ago is no longer adequate,” writes Philip Wallach from the American Enterprise Institute. He highlights that the current budgetary mechanisms, including the adoption of discretionary spending limits, “have [...] failed to put the nation on a sustainable trajectory.” Figure 2 shows that the debt would far exceed the 2023 level, even with the more drastic reductions in discretionary spending proposed by the House Freedom Caucus. Wallach mentions several initiatives that can address the debt problem and improve the current processes, including the Responsible Budget Targets Act (RBTA), which would establish a Swiss-like debt brake in the US. He also highlights the importance of fixing the defects in existing processes, including “Clarifying budget baseline rules, making budget resolutions easier to enforce, changing the treatment of changes to entitlement spending, and discouraging gimmicks [...]”
