Debt Dispatch: The Best and Worst of 2024
Highlighting fiscal missteps and our top-read Substacks in 2024
Let’s start with the bad. Congress brought 2024 to a close by passing a budget-busting lame duck bill, pouring fuel on the deficit fire, including:
$100 billion in new ‘emergency’ spending (as fmr. OMB chief economist J.D. Foster explains, when Florida and the Gulf coast get hit regularly with hurricanes, that’s not an emergency (an extremely rare event), but geography);
tens of billions in farm subsidies;
repeal of the windfall elimination and government pension offset provisions, which as Rep. Jason Smith (R-MO), chairman of the Ways and Means Committee, explains, will allow “workers with earnings that were exempt from Social Security payroll taxes [to get] more generous treatment from Social Security than workers who spent their whole careers contributing to Social Security.”
Just how generous? Larry Kotlikoff gives the example of a school teacher who will receive a $830,625 lifetime windfall from this law as “her annual retirement benefit more than doubles —from $3,893 to $8,758. And her widows benefit almost triples — from $15,688 to $42,355.” Elizabeth Bauer, who goes by ‘Jane the Actuary’ calculates that a payroll-tax-exempt public-sector worker with a brief private sector stint will receive Social Security benefits that are 45% higher than someone with the same earnings history who paid Social Security’s payroll tax throughout their working life.
Why did congressional Republicans sign off on this? Andrew Biggs posits that "either because they failed to understand its details or because they assumed it would not gather the votes to pass. In that latter case, supporting the Social Security Fairness Act would be a costless way to win support from police and firefighters, who have trended toward Republicans in recent years.” As the Wall Street Journal points out, “House Republicans passed the bill after the election, perhaps as a payoff to the International Association of Fire Fighters, which declined to endorse Kamala Harris and has led the lobbying campaign on Capitol Hill.”
With 2024 coming to an end, we thank our 2787 subscribers and wish you Congressional Fiscal Restraint in the New Year!
To wrap up this year, we highlight our best work, based on what drew the most interest from our growing Debt Dispatch readership. Two themes stand out: the Department of Government Efficiency (DOGE) and Social Security. It’s no surprise—DOGE represents a promising initiative that could improve the US fiscal outlook with a bold approach, led by two high-profile leaders: Elon Musk and Vivek Ramaswamy. Social Security, the largest federal program, is steeped in myths which we’re debunking, including highlighting how the program is running big cash-flow deficits while racing toward exhausting its borrowing authority when the so-called trust fund is depleted in 2033.
Here are the top five most-read Debt Dispatch Substack’s of 2024:
Debt Digest | 10 Programs the Musk-Ramaswamy DOGE Should Cut: We published this edition of Debt Digest two days after President-elect Donald Trump announced DOGE. Here, we highlighted our Cato colleague Chris Edwards’ recommendations of ten federal programs that should be “put on the chopping block.” The list includes K‑12 public school subsidies, urban transit subsidies, foreign aid, green subsidies, broadband subsidies, public housing and rental subsidies, community development grants, junk food subsidies, farm subsidies for the rich, and reducing federal Medicaid costs. Edwards also suggests fully eliminating some of these programs, primarily aid-to-state programs like K-12 education.
With a BRAC-like Structure DOGE Can Succeed Where Other Commissions Have Failed: “DOGE’s mission to streamline government by cutting waste and excess regulations is critical, but its success could be short-lived if we don’t aim higher. America’s economic future depends on tackling the inefficiencies in bloated entitlement programs. If DOGE could launch with BRAC-like authority, it could break free from the gravitational pull of political gridlock that has hampered entitlement reform efforts to date. Congress should establish clear goals for DOGE to not only trim Washington largesse but to also stabilize the US debt. By empowering DOGE with BRAC-like powers, Congress can ensure its recommendations are implemented. Without such bold action, DOGE risks becoming another failed commission instead of the transformative force America needs.”
Controversial Social Security Benefit Increase Would Cost Taxpayers $196 Billion: The Social Security (Un)Fairness Act, which eliminates the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), will provide unfairly high benefits to public sector workers, costing taxpayers about $200 billion over ten years and deplete Social Security’s trust fund borrowing authority more quickly.
Fast Facts about Social Security: This fact sheet, published after the release of the 2024 Social Security Board of Trustees report, highlights the key facts about the program’s financial trajectory and reform options. Social Security’s OASI program spent $1.2 trillion in 2023, with costs projected to nearly double to $2.1 trillion by 2033. For the first time in the program’s history, the number of beneficiaries will exceed 60 million by 2025, straining the system as the worker-to-beneficiary ratio declines. With the so-called trust fund projected to be exhausted by 2033, current law calls for a 21 percent benefit cut. We outline reform options that would reduce Social Security’s deficits and ease its burden on American workers, such as adopting a more accurate inflation index, indexing initial benefits to prices, raising eligibility ages, and transitioning to a predictable, targeted benefit scheme.
Washington Post Global Social Security Comparison Misses the Forest for the Trees: A Washington Post piece highlighting Social Security’s below-average replacement rate compared to other OECD countries missed the broader context of the US retirement system. Including private pensions and savings, the US system replaces over 73 percent of pre-retirement earnings for workers—well above the OECD average. Unlike many OECD countries, where government benefit provision dominates retirement income, US seniors rely more on private savings, which they own and control. Universal savings accounts (USAs) could aid more Americans in private saving, as USAs lack the complex rules that deter low-income and younger workers from participating in 401(k)s and IRAs. Focusing Social Security benefits on low earners while scaling back benefits for high earners would align the program with its original purpose of providing a safety net for those most in need of income support in old age.
My understanding of Universal Savings Accounts (USAs) suggests they are tax-advantaged savings vehicles very similar to Roth IRAs. Contributions are after-tax. Earnings accumulate tax-deferred. Both contributions to a USA account and earnings on those contributions can be distributed at any time, tax free and penalty tax free.
However, that isn’t much of an enhancement over today's Roth IRAs. Withdrawals from Roth IRAs are contributions first, tax-free and penalty-tax-free - anytime, for any reason. Similarly,
if you're under age 59½ and your Roth IRA has been open five years or more, distributed earnings on Roth contributions will not be subject to any income or penalty taxes if you use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase, or you become disabled or pass away.
Also, in a Roth IRA, a withdrawal of tax deferred earnings after 5 years of participation and after reaching age 59 1/2 is not subject to income or penalty taxes.
So, the only obvious difference is the tax treatment of a withdrawal of earnings prior to 5 years of participation or prior to age 59 1/2 (other than the exceptions stated above). Those distributions are subject to income taxes plus a 10% penalty tax for early withdrawal.
Instead of changing the tax treatment for earnings, the better alternative is to leave Roth IRAs alone, given that the suggested changes would reduce taxes and increase the federal deficit, already $2+ Trillion a year, and add to the national debt, already $36 Trillion.
If you want to make an intelligent change to IRAs, so as to allow accumulated assets to be used for any purpose without triggering leakage or taxation, permit loans from IRAs on the same basis as provided in employer-sponsored, tax-qualified plans subject to ERISA (where loans are possible for good reason, bad reason or no reason whatsoever).
In almost all such loan processing, the loan comes with a market rate of interest. Payments of principal and interest are credited back to the IRA owner's own account. Effectively, the assets never leave the plan, but become a fixed income investment in the IRA (earning interest charged on the plan loan). That interest could be tax deductible if secured with a mortgage, where the loan was used as part of a purchase of a personal residence. And, the interest would be distributed tax free if held in the account until the participant met the 5 year/age 59 1/2 requirements.
Call the Roth IRA that allows for plan loans the Bank of Romina, or the Bank of Ivane.
Wow! With those kinds of increases in Social Security Benefits, it definitely will run out sooner than later!