Debt Digest | Social Security’s Finances Are Worse Than Reported
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
No, corporate greed did not cause inflation. Cato’s Ryan Bourne and American Institute for Economic Research’s Bryan Cutsinger challenge the widespread belief that corporate profit-seeking caused the high inflation of 2021 and 2022. They explain: “If one firm decides to jack up prices, they’d not only risk losing customers to their rivals, but any existing consumer paying the higher price would have lower money balances left over to spend on other goods and services, reducing demand and so prices for other items.” According to Bourne and Cutsinger, high inflation was the result of “a macroeconomic policy that had led spending to explode, forcing up all prices in the medium-term.” They also attribute high corporate profits during this period to the surge in government spending, stating that “when total spending deviates positively from trend, corporate profits are likely to as well [see the figure below].” For more on so-called “greedflation,” see Cato’s recent book, The War on Prices.
Social Security crowds out private savings. In his recent testimony before the Senate Finance Committee, Cato’s Adam Michel highlighted the significance of private savings and explained how universal savings accounts (USAs) can help more Americans save. He also discussed how government programs, such as Social Security, discourage private savings. According to Michel, “Early work from Martin Feldstein in the 1970s, corroborated and refined by subsequent research, shows that each dollar of promised Social Security benefits can reduce private savings by as much as 50 percent. Jagadeesh Gokhale, Laurence Kotlikoff, and John Sabelhaus find that increased Social Security and Medicare benefits are significant factors explaining the multi‐decade decline in the US savings rate (which declined from an average of 12 percent in the 1970s to 6 percent in years before the pandemic). The lost private savings and resulting smaller capital stock have likely placed significant downward pressure on the size of the US economy.”
Farm bill budget gimmick alert. The House farm bill includes a provision limiting the Secretary of Agriculture’s authority to spend money through the Commodity Credit Corporation (CCC), which has a standing line of credit with the Treasury for emergencies. The House Agriculture Committee is pressuring the Congressional Budget Office (CBO) to translate this provision into $53 billion in savings to justify increases in costly and economically harmful farm subsidy programs that mostly benefit wealthy Americans. However, Taxpayers for Common Sense (TCS) warns that this is a budget gimmick without real savings. As TCS Senior Policy Analyst Joshua Sewell noted in an email exchange: “Cancelling your irresponsible teenager’s credit card is a great idea and likely prevents you from incurring debt, but it does not produce income for you to spend somewhere else.”
The US faces a rising threat of fiscal dominance. Dr. Stephan Kirchner, a Senior Fellow at the Fraser Institute, writes: “In a fight between monetary and fiscal dominance, fiscal institutions will win out if government is so determined and monetary institutions are not strongly grounded.” Highlighting this concern, Dominik Lett and I argue that unsustainable federal debt growth increases the risk of fiscal dominance in the US: “With entitlement spending growth driving a worsening fiscal picture, the US could enter a new period of fiscal dominance where monetary policy serves fiscal ends, threatening central bank independence and America’s economic future. Following aggressive fiscal and monetary stimulus during the pandemic, legislators should avoid the siren’s call of elevated deficit spending or risk higher inflation.”
Social Security’s finances are worse than reported. The American Enterprise Institute’s (AEI) Mark J. Warshawsky argues that Social Security’s financial outlook is worse than the latest Trustees report suggests. According to Warshawsky, “The current report accurately reflects a long-term decline in disability rates, but fails to do the same for long-term declines in fertility rates. On net, this produces more favorable projections of the program’s finances.” It is worth noting that the US fertility rate hit a 44-year record low in 2023. Warshawsky claims that if the Trustees adopt more realistic projections of birth rates, similar to those used by the CBO and Census Bureau, the already concerning Social Security financial projections will worsen.
