Debt Digest | A $196 billion Social Security Mistake

Links & Fiscal Facts

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

• Congress should reverse its $196 billion Social Security mistake. The Social Security Administration (SSA) recently released an FAQ on the so-called Social Security Fairness Act (H.R. 82), which eliminates the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). While SSA focuses on the benefit increases that public sector workers can expect to collect (some in excess of $1,000 more per month!), the FAQ fails to mention that this legislation comes at a steep cost to younger workers—adding $196 billion to Social Security’s cash-flow deficits over the next decade and accelerating trust fund insolvency by 6 months.
  
  It’s not too late for Congress to backtrack before the SSA implements these unfair benefit increases. By the agency’s own admission: “SSA expects that it could take more than one year to adjust benefits and pay all retroactive benefits.”
  
  Before the repeal of WEP and GPO, stabilizing Social Security’s finances without benefit reductions would have required an immediate and permanent payroll tax hike from 12.4 percent to 16.73 percent—an increase of $2,660 for someone earning $61,440 per year. Now, the necessary rate is 16.84 percent—costing the median worker an extra $68 per year (see the figure below). In other words, 180 million workers will pay more so 3.2 million retired public sector workers can collect more.

  

  
  The SSA emphasizes the complexity of implementing these changes, warning that processing must be done manually on a case-by-case basis. Yet, instead of reconsidering the law’s impact, a bipartisan group of 28 senators is pressuring the agency to rush implementation, increasing the risk of costly errors and improper payments.
  
  It’s not too late to reverse course. Congress should repeal this costly mistake before the damage is done.

• The arts should be funded by private donations, not taxpayers. President Trump recently posted on Truth Social that he plans to replace the Kennedy Center Board with new members and appoint himself as Chairman. However, the federal government shouldn’t be involved in the Kennedy Center—or the broader arts industry—at all. As I’ve previously told the New York Times: “The minuscule portion of art funding that comes from the federal government does not support the arts in any meaningful way; rather, it distorts the art market toward what is politically acceptable.” I’ve also written for the Heritage Foundation: “The Kennedy Center [or the arts industry in general] could be funded by th[e] private donations and the robust ticket sales rather than with taxpayer dollars of everyday Americans who may never experience the music and theater for which they are paying.” See the video below, where I discuss this issue with Sen. Rick Scott (R-FL).

• Automatic adjustments can stabilize Social Security and Medicare finances. In his new paper, James C. Capretta of AEI identifies structural drivers of US fiscal troubles and proposes several reforms. One of the factors he highlights is the increasing cost of entitlements and their drag on the federal budget, arguing that automatic adjustments to Social Security and Medicare would be an effective solution: “With this one reform, Congress could simultaneously ensure the permanent solvency of the nation’s two most important programs for the elderly and eliminate a substantial source of long-term fiscal instability.” In our upcoming book, “Reimagining Social Security: Global Lessons for Retirement Policy Changes,” we explore how Canada, Germany, and Sweden have successfully implemented automatic stabilizers in their pension systems—contributing to their long-term sustainability.

• The new National Economic Council director could push for spending restraint. Mercatus Center’s Veronique de Rugy highlights a promising development for US fiscal policy—President Trump’s appointment of Kevin Hassett to lead the National Economic Council. As de Rugy notes, “Personnel is policy,” and Hasset’s research track record offers positive signals. For example, his study on corporate taxes and wages found that workers bear the cost of corporate tax hikes, suggesting he may resist efforts to offset tax cuts with higher corporate taxes. Importantly, Hasset, together with Andrew Biggs and Matthew Jensen, analyzed more than 100 case studies of countries trying to reduce their deficits, concluding that spending cuts are more effective than tax hikes in reducing debt. If Hassett pushes for serious spending cuts to offset tax cut extensions, it could help curb deficits and boost economic growth.

• Republicans can offset tax cuts by closing tax code loopholes. Cato’s Adam Michel highlights that some Republican lawmakers believe extending the 2017 Trump tax cuts will be impossible without reducing revenues by at least $4.7 trillion. However, Michel argues that Congress could offset trillions in tax cuts by closing loopholes in the tax code. Potential reforms include repealing green energy subsidies ($1.2 trillion in savings over ten years; $224 billion from eliminating electric vehicle credits only), ending tax-exempt municipal bonds ($400 billion over ten years), and applying a SALT cap to corporations ($400 billion to $800 billion in potential savings). Michel concludes: “This list is just a fraction of the roughly $14 trillion in distortionary loopholes, credits, deductions, and other spending in the tax code. Republicans should not give up on cutting spending across the entire federal budget, including in the tax code.”