Debt Digest | Minutes to Midnight
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts (there will be no Debt Digest next week as we celebrate Thanksgiving):
Two decades before disaster. “Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation). Unlike technical defaults where payments are merely delayed, this default would be much larger and would reverberate across the U.S. and world economies,” write Jagadeesh Gokhale and Kent Smetters about the Penn Wharton Budget Model. Read the brief here.
“Everybody ought to read this book. But baby boomers must,” wrote Andrew Stuttaford with the Wall Street Journal about Adam Ferggusson’s book: When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. The book offers a sobering look at what can go wrong when governments resort to excessive money printing to finance public expenditures. “Without a reliable pricing mechanism, much of the German economy eventually ceased to function, even at the most basic level. Rent was payable in butter, a ticket to the movies with a lump of coal. Farmers stopped sending food to the cities…Most haunting are the depictions of those broken on inflation's wheel, the workers without a union to protect them, the retired trying to live on pensions that had lost all meaning, the once-proud bourgeois after the annihilation of their savings.” George Selgin similarly “highlights dangerous precedents in U.S. history” and growing interest among some economists and politicians in a “free lunch” government funding mechanism in his book The Menace of Fiscal QE. See Boccia’s review of Selgin’s book here.
Who pays for Scandinavian welfare states? The Tax Foundation’s Daniel Bunn, Sean Bray, Joost Haddinga write, “Scandinavian countries are well known for their broad social safety net and their public funding of services such as universal health care, higher education, parental leave, and child and elderly care. High levels of government spending naturally require high levels of taxation. Denmark’s top statutory personal income tax rate of 55.9 percent applies to all income over 1.3 times the average income. From a U.S. perspective, this means that all income over $82,000 (1.3 times the average U.S. income of about $63,000) would be taxed at 55.9 percent.”
This Social Security tax increase would fall short. The Congressional Budget Office estimates that subjecting all earnings over $250,000 to the payroll tax—that is, imposing an additional 12.4 percent tax rate on those earnings—would delay the date of exhaustion of the Social Security trust fund from 2033 to 2046. To make the program solvent in the long term, Congress will need to muster the willpower to limit spending (or implement much broader and punishing tax hikes). One option: switching the benefit formula to adjust workers’ initial benefits for inflation, rather than the growth in average wages. So-called price indexing would close Social Security’s 75-year funding gap as Boccia explains here.
Raise the retirement age. “[M]any people are now drawing from Social Security for as much as a third of their adult lives, if not more. If people took the same number of retirement years as the average person retiring in 1940, they would stop working at around 77,” argues C. Eugene Steuerle co-founder of the Urban-Brookings Tax Policy Center and Stanford’s Glenn Kramon. Republican presidential hopeful Nikki Haley says she’ll push for reforms to save Social Security. “I’ll raise the retirement age – only for younger people who are just entering the system. [...] We’ll keep these programs the same for anyone who’s in their 40s, 50s, 60s, or older, period.” Props to Nikki Haley for advocating commonsense and necessary Social Security reform—even though this change should be implemented much sooner.
Meanwhile in Canada. Alberta Premier Danielle Smith plans to pull her province out of the Canada Pension Plan (CPP)—a Canadian equivalent to the US Social Security program. “Smith argues that a new pension plan for Albertans would lead to bigger payments in retirement and lower premiums and is proposing to transfer C$334 billion, or 53% of CPP's assets, from the scheme into a new provincial pension scheme in 2027, based on a study commissioned by the province…Any province can withdraw from CPP by giving written notice, starting a three-year clock for the federal government to evaluate whether Alberta has come up with a comparable pension plan for assets to be transferred into. If the plan is not found comparable to the CPP, then there is no obligation for any asset transfer.”
US leads on global debt growth. Mary McDougall, Sam Fleming, Colby Smith, and Kate Duguid of FT write, “The IMF says global public debt is on course to approach 100 per cent of gross domestic product by the end of the current decade. Among the biggest drivers is the US, where the government deficit is on track to exceed 8 per cent of the country’s GDP this year.” See the graph below comparing the US budget deficit to other G7 countries. “We’re not just worried about the amount of government borrowing for normal stuff like healthcare spending and pensions,” said Jim Leaviss, chief investment officer of public fixed income at M&G Investments. “Instead, he is worried about ‘structural’ issues such as the size of debt interest payments, the impact of central banks shrinking their own bond holdings and the huge 31 per cent slice of US government bonds that will need to be refinanced next year.”
