Debt Digest | Interest Payments as a Share of Available Revenues to Reach Record Highs

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• Biden-Harris election-year maneuver will cost taxpayers $7 billion. The Congressional Budget Office (CBO) estimates that the Inflation Reduction Act (IRA) provisions, including capping enrollees’ out-of-pocket costs and limiting premium increases, will raise the per-enrollee cost of Medicare Part D by 179 percent. This could have led to significant increases in Part D premiums before the upcoming presidential election. However, to prevent frustrating senior enrollees before the election, the Biden-Harris administration announced temporary subsidies to avoid premium increases. As Cato’s Michael Cannon argues, the temporary subsidies “[hide] from enrollees the cost of the IRA’s expensive new coverage by shifting that cost to taxpayers.” According to the CBO, these subsidies will increase federal spending by $5 billion in 2025, which will add $2 billion in net interest costs between 2025 and 2034. Cannon writes, “The Biden administration is literally spending money Congress chose not to spend, increasing federal deficits and debt, to hide the cost of its health reforms, all in the service of buying votes for its presidential candidate in an election year.”

• We ignore the growth in the federal debt at our own peril. David Leonhardt writes in The New York Times Morning Newsletter: “I know that the federal debt can be a hard topic to think about, partly because budget scolds have been warning for years that it is too large. Then it keeps growing, and nothing bad seems to happen. Those scolds can sound like Aesop’s boy who cried wolf. But it’s worth remembering what happens at the end of that fable: Eventually, the boy was telling the truth, and a wolf really did come to eat the town’s sheep. Likewise, the federal government will eventually face consequences for spending more money than it raises in taxes.” As I’ve noted previously: “A U.S. debt crisis would have significant negative consequences for both the economy and individual Americans. A fiscal crisis could lead to a rapid increase in interest rates, inflation, and unemployment. This could trigger a recession and severely reduce economic growth.”

• Interest payments as a share of federal revenues to reach record high. Joshua Rauh, Senior Fellow at the Hoover Institution, warns that “the federal government is playing with fire with its debt and deficits.” Rauh argues that lenders are primarily interested in the ratio of cash flow (revenues) to interest payments to assess a country’s ability to roll over maturing debt without significantly devaluing currency. Rauh highlights that interest payments as a share of federal revenues will cross the 20 percent threshold in 2025, a record high. He also points out that payroll tax revenue should be excluded from the revenue denominator, as these taxes are immediately spent on Social Security (and thus not available to pay for interest). Under this accounting, the interest-to-revenue ratio will hit 27.9 percent in 2025, again a record high (see figure below). Rauh foreshadows that this trajectory may lead the government “to pressure the Fed to tolerate higher inflation,” which will be detrimental to the US economy. For more on the threats of fiscal dominance—where monetary policy serves fiscal ends—read our work here and here.

  

• There is no retirement crisis. In his recent report, the American Enterprise Institute’s (AEI) Andrew Biggs critiques an article in The Hill titled “10 reasons we must urgently get over our retirement crisis denial,” arguing that these reasons “are either trivial or inaccurate.” He challenges the claim that 10 percent of American seniors live in poverty, explaining that this figure is based on incomplete data that misses most of the income from private retirement accounts like 401(k)s, thus overstating poverty levels. According to a previous study conducted by Biggs and Sylvester Schieber, “the CPS [Current Population Survey] captured only around 60 percent of all income seniors received from private retirement plans.” Furthermore, Biggs disputes the claim that seniors will face $120,900 on average in long-term care costs, noting that the actual average out-of-pocket cost is closer to $24,000 throughout retirement, with the rest covered by government programs and private insurance. He further challenges other claims in the article, such as that seniors cannot cover emergencies and don’t have adequate retirement savings. According to Biggs, “Since 1979, inflation-adjusted average incomes after taxes and transfers increased by 126 percent for elderly headed households versus 77 percent for non-elderly households (CBO 2021). Seniors have shifted from being a disproportionately poor group to being a disproportionately rich one…According to OECD data, the median US retiree has the second-highest disposable income in the world, following only Luxembourg.” Biggs concludes that the US retirement system is performing well, and policymakers should prioritize addressing Social Security’s funding shortfalls, instead of overhauling the entire system.

• Trump and Hariss’s misguided approach to tax reform. Cato’s Adam Michel criticizes tax proposals from Donald Trump and Kamala Harris that target special interest groups, arguing they will complicate the tax code and be economically damaging. For example, he points out that exempting tip income from taxes—a proposal supported by both candidates—would increase deficits and “create strong incentives to increase tipping as part of worker compensation to maximize tax-free income.” Michel also warns that expanding child tax subsidies, which also has bipartisan support, could cost trillions while being ineffective at reducing child poverty or boosting fertility. Regarding Trump’s proposal to exempt Social Security benefits from taxes, Michel argues the opposite, saying that “a larger share of Social Security benefits should be included in taxable income in favor of lower tax rates for everyone, not just seniors.” He concludes: “The major tax breaks proposed by Trump and Harris, taken together, would cost trillions of dollars. [...] [I]t’s clear that without serious spending cuts, this year’s campaign promises will make the 2025 tax cliff all that much more challenging.”