What could a President Biden and a Republican Senate led by Mitch McConnell (R-Ky.) agree on?
Not much. Republicans are coming off what they believe is an election victory after having taken a risky, exposed position delaying COVID-19 spending stimulus until it was more fiscally responsible. After that success, and given the less densely populated states they represent, with President Trump out of the picture, Republicans must reclaim their fiscal prudence posture (at least until the next Republican president).
Republican congressional pressure on spending under Democratic presidents resulted in the Clinton balanced budget and the Obama sequester that produced the best economic growth of those administrations. Republican voters won’t countenance their elected representatives once again abandoning fiscal responsibility.
Meanwhile, Biden proposed but didn’t emphasize an expansive program of new spending ($5.4 trillion), tax increases ($3.4 trillion) and larger deficits ($2.0 trillion). An irresistible force of pent-up Democratic demand for spending meets an immovable object of Republican senators apprehensive about renewed tea party pressure.
Will the Republicans go along with $650 billion for urban housing? How about the $352 billion for expanding ObamaCare? The $1.9 trillion needed to expand federal involvement in education? How about $1.6 trillion for green energy? None have a chance.
Most of the Biden Democratic spending wish list is a non-starter for Republican senators, but one major Biden initiative addresses one of the country’s most critical problems — the insolvency of Social Security.
According to the Social Security Trustees report, at the end of 2019, the long-term shortfall in Social Security was $16.8 trillion in present value or over 78 percent of the entire U.S. economy. This is on top of the existing regular federal debt of 135 percent of the economy as measured by Gross Domestic Product. The Trustees state that under current law, the “OASI Trust Fund reserves are projected to become depleted in 2034,” after which retirement benefits will be reduced by 24 percent. This is a crisis.
The Biden Social Security proposal increases minimum benefits to retirees and taxes high earners. It closes the system’s long-term imbalance by about 40 percent but leaves $9.6 trillion of remaining deficit. By taxing current workers to pay retirees, it increases intergenerational unfairness. Higher taxes, continuing deficits and generational unfairness will not be accepted by Republicans, who, under Trump, refrained from addressing looming Social Security problems. Historically, Republicans have favored an option for Social Security participants to make private investments, which could offer higher retirement payouts.
Historically, the stock market has provided returns after inflation of about 7 percent per year. According to Social Security’s chief actuary, participants retiring from here on out will receive annual returns of 3 percent to 5 percent for low incomes (below $22,588) and 1 percent to 3 percent for higher incomes.
Of course, the government must still guarantee minimum payments to beneficiaries. But with reasonable regulation of investments and withdrawals, the power of higher compounded market returns would minimize this cost.
Most of the existing Social Security deficit consists of legacy debt incurred for the program’s original participants who made minimal payments for their benefits. The Democrats’ proposed tax increase could help pay this without undermining sound retirement finances for current participants.
Combining Democratic and Republican policies to raise revenues while offering a private investment option could provide the most advantageous retirement program for participants. Lower-income participants benefit significantly from private accounts, which allow them to accumulate wealth and, if desired, leave bequests, breaking the vicious asset-less cycle of poverty, while maintaining the security of a payment guarantee. Higher income participants may pay somewhat higher taxes but would have enhanced retirement funding with tax deferred higher returns.
It is possible that near-term federal deficits will expand if large numbers of Social Security participants opt for a private investment option, but this will spare future larger deficits, which are projected by the Congressional Budget Office (CBO) to average a double-digit percentage of the economy as far as CBO’s eye can see.
While neither party will get all it wants, and each party must swallow hard on some provisions, bipartisan agreement is inescapable for significant Social Security reform. Combining the parties’ proposals is the best outcome for participants.
Rep. John Larson (D-Conn), chairman of the Ways and Means Social Security Subcommittee, who is proposing Social Security reform, says, “I would love to open up a dialogue, but I need to know how it works for the average American.” Mitch McConnell and Joe Biden have established that they can compromise with each other in Obama budget agreements. A fitting capstone for them, after their combined century of public service, would be to fix Social Security to better retirees’ lives for decades to come.
Douglas Carr is a financial markets and macroeconomics researcher. He has been a think tank fellow, professor, executive and investment banker.