President Joe Biden’s plan to inject $4 trillion of social and capital infrastructure spending into a $21 trillion economy could help many people take care of their families. But there are also major economic and political downsides. These risks could be reduced, and the proposal’s value increased, by putting Social Security on the table and targeting new social spending to people most in need.
Some economists think the Keynesian jolt would be too big, triggering inflation and pushing the debt to levels that would restrict government’s ability to handle future challenges. The Congressional Budget Office projects that in 20 years, almost 30% of all yearly fiscal revenue will have to be used to pay interest on government debt, up from the current level of 8%, according to an analysis in the Wall Street Journal.
Closely related is the government’s capacity to raise revenue. The president says he’s only after the very wealthy to pay for his plan and won’t raise taxes on families making under $400,000 a year. Senate Minority Leader Mitch McConnell doesn’t want any new taxes at all. Just how much tax revenue could be extracted from the wealthy, now and in the future? If we tap out the rich now, who will bear the burden of spending down the road?
The size of the spending spree, along with rapidly growing debt, raises the question of why Social Security’s deficit isn’t on the table as well. Last year, Social Security’s trustees projected the program’s 75-year shortfall at $16.8 trillion. For those of us used to paying mortgages, this translates into about $250 billion each year in higher taxes or benefit cuts that Congress needs to find for the rest of the century. That’s a lot of money. But given the figures being thrown around these days, it might be politically palatable.
On an annualized cost basis, Biden is proposing to expand the social safety net by much more. A new and broader tapestry of benefits would include money for raising kids, free college, child care, and a marker for a major expansion of home care for the elderly (the administration promises more detail later).
Would adding this much weight to the country’s social infrastructure jeopardize the stability of what is arguably its New Deal keystone? Social Security’s shortfall amounts to about 1% of gross domestic product over the next 75 years. Over that period, its Old-Age, Survivors, and Disability Insurance program needs about 22% more revenue, or to cover 18% less in benefits, or some combination of both.
If Congress fails to act, Social Security benefits will drop by about 25% when trust funds are exhausted sometime early in the early 2030s — about the same time that the CBO projects interest on the public debt to begin rising significantly. The CBO estimates federal government debt will reach 107% of GDP in 2031 (surpassing its historical high) and almost double to 202% of GDP by 2051.
I have made the case that the wealthy and upper-echelon professionals could cover the cost of bringing Social Security into balance by eliminating the FICA tax cap on wages and raising the capital gains tax. Higher estate taxes could help as well.
Low-wage workers, who now make up almost half the workforce, don’t have money to spare. They have shorter average life spans, leaving them less likely to collect old-age benefits than higher-income workers. Another reason to target the affluent is that the growth of U.S. labor income, the base of Social Security’s financing, has lagged behind that of capital income. Poor people don’t have much capital income.
Just as Social Security could be put on the bargaining table, a lot of misdirected spending could be taken off. Providing free college for everyone, as an American Enterprise Institute scholar points out, will enable colleges to continue raising tuition prices, thereby making it harder for society to cover these costs in the long run. It may be wiser to target subsidies to those needing them most rather than opting for a social insurance model.
Proposals to spend trillions more on raising kids, elder care, and child care face a similar policy challenge. Unless targeted to those with lower incomes, the cash injection will likely drive prices higher, making it harder for all but the highest incomes to get what they need. As we learned with the stimulus bills, the top 20% don’t need more cash. The poorest need the most. Those with incomes in the middle need less help.
Congressional negotiators are probing the possibility of finding middle ground on the physical infrastructure part of the package. After that process runs its course, Democrats will have to decide whether to use reconciliation to force the social infrastructure components to a vote. Both sides need to think carefully about which social programs are most important and how the country can foot the bill.
By the way, where is this year’s Social Security trustees report? Wasn’t it published in April last year?
Karl Polzer is the founder and CEO of the Center on Capital and Social Equity.
