A debt limit crisis that leads the United States to default on its financial obligations would be catastrophic. A U.S. debt default would lead to the demise of the dollar as the world’s reserve currency, increase interest rates, and reduce American influence abroad. MAGA Republicans, who supported the insurrection and are supportive of Putin’s war in Ukraine, may not be opposed to these outcomes.
GOP members of congress are threatening to refuse to support a debt-limit discharge unless the Senate and the President agree to cuts in Social Security. Go here for some Republican ideas on linking increases to the debt limit to changes in Social Security and Medicare.
The Debt Limit and Entitlements:
Many older people have very little in private retirement savings and are totally dependent on both Medicare and Social Security. Efforts to change retirement and Medicare benefits must be preceded by reforms that decrease the number of older households with low levels of retirement assets or reserves for health expenditures.
A proposal to increase the minimum age for Social Security benefits from 62 to 63 or longer would reduce the future debt to GDP ratio. Financial markets are forward looking, hence the future expected debt to GDP ratio is a more important financial variable than current-year government deficits. Entitlement reform should be more focused on the more important debt measure.
Immediate changes to entitlement spending would be detrimental to the economy, would reduce current consumption and would increase poverty among older households.
Reductions in entitlement spending cannot be implemented until after private retirement savings is increased, especially for households that currently do not save enough for retirement.
Efforts to expand private retirement savings will increase government deficits.
Restrictions on government spending and tax expenditures for pension, health and other savings incentives stemming from a stringent debt limit will delay efforts to increase private retirement savings and will delay the needed increase in the retirement age.
The debt limit is not the only lever to force changes in entitlement spending. The Trustees of the Social Security Trust fund project the trust fund will be depleted in 2035. The projected depletion of the Trust fund will, under current law, lead to the automatic benefit cuts. The avoidance of automatic benefit cuts, not the debt limit, is the best way to motivate actions on entitlement reform.
Republicans do not have the votes for benefit reductions including changes in mean testing or increases in the retirement age. Immediate changes in benefit formulas would be disastrous to current retirees and worker nearing retirement. There is no support for MAGA-style entitlement reform in the Senate or in the current Administration. The Democrats can’t link any entitlement change to a temporary increase in the debt limit because such an agreement would only lead to demands for additional changes in entitlements once the debt reaches the new limit.
The 2023 fiscal discussion should center on efforts to reduce COVID-era emergency expenditures rather than efforts to force immediate changes in entitlement spending. These debates will also be difficult and could lead to a government shutdown, an admittedly undesirable outcome but one that is less catastrophic than a default on the U.S. debt.
David Bernstein, an economist living in Denver Colorado, is the author A 2023 Healthcare Reform Proposaland Alternatives to Biden Student Debt Relief Proposals.