Debt Digest | Track and Offset Emergency Spending
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Political threats to central bank independence. A new NBER paper by Thomas Drechsel delves into the effects of political pressure on the Federal Reserve, using a novel dataset of interactions between US Presidents and Fed officials from 1933 to 2016. Drechsel finds that political pressure can significantly increase inflation and alter monetary policy expectations. Political pressure is one mechanism by which fiscal dominance (where fiscal pressures cause the central bank to act in ways it otherwise would not) can threaten central bank independence and economic stability. Should the US continue down the present fiscal path, money-printing may become the easiest or only politically feasible way out. As we previously argued, “Time is of the essence to slow the growth in spending before fiscal dominance becomes the seemingly more attractive option.”
Track and offset emergency spending. In an interview with the Institute for Progress’ (IFP) Santi Ruiz, the Government Accountability Office’s (GAO) Orice Williams Brown stated, “GAO recently produced its first government-wide estimate of potential fraud, and, in the federal government, we've looked at the period of 2018 through 2022. We estimate that anywhere from a quarter to half a trillion dollars annually was spent fraudulently [...] We recently developed a framework for emergency programs, to help agencies think about having the controls they need in place before the emergency actually happens, so they aren't scrambling to do it in the moment.” While agencies implement emergency-related internal controls, Congress should adopt budgetary controls that track and offset emergency spending. As Dominik Lett and I have argued, this would allow Congress to pay for emergencies responsibly “by reducing future spending by the amount of current emergency spending over the following five years.”
Older Americans increasingly worry about Social Security and Medicare. According to the West Health-Gallup 2024 Survey on Aging in America, US adults increasingly worry that Medicare and Social Security will not be available when they become eligible. For Medicare, “The increase in concern is sharpest among those aged 50 to 64 (up 13 points to 74%) and 40 to 49 (up nine points to 83%, the highest level of all age groups).” Concerns about Social Security are even higher, with similar age groups experiencing the largest increases. Among the 50-61 age group, “81% are now worried, compared with 72% in 2022, a nine-point increase.” The survey results make sense, given that Social Security and Medicare trust funds are projected to be depleted in 2033 and 2036, respectively. Political obstacles delaying reforms exacerbate the programs’ financial issues. A BRAC-like fiscal commission could help.
End wage indexing for Social Security benefits. According to Dr. Philip Swagel, Director of the Congressional Budget Office, “most of [the] increase [in Social Security outlays] occurs over the next decade as members of the large baby boom generation retire.” Furthermore, Dr. Swagel explains, “In CBO’s projections, initial annual Social Security benefits—that is, the real (inflation-adjusted) benefits that people receive in the first full year that they claim them—grow over time in a scheduled-benefits scenario because real earnings are expected to continue to rise (see Figure 2).” Social Security pays excessive benefits to wealthy retirees, and one of the reasons is wage indexing for initial benefits. As I have written, “Shifting to price indexing for calculating initial benefits, at the very least when calculating benefits for higher income earners, is a sensible policy change.”
Social Security’s trust fund is an accounting ledger with no real assets. In a recent tweet, Manhattan Institute’s Brian Riedl explained why a large payroll tax hike, while achieving Social Security’s “75-year solvency,” would also result in trillions of additional federal debt. It is due to the way the program’s trust fund operates; instead of saving surpluses generated by the tax hike, it would send these funds to Congress to spend in exchange for empty IOUs. When the program would start running cash-flow deficits again, Congress would have to borrow what it owed Social Security, plus interest (see the figure below). As I have previously written, “We’re really talking about intergenerational debt, since it is current and future taxpayers who are on the hook for present government spending, including any debts government agencies incurred between each other (such as spending the taxes intended for Social Security on other government programs).”
