A post-Biden economic agenda

Both President Biden and former President Trump have left the nation with severe problems, which are not being resolved.

·      Recent pension reforms enacted in the Trump era Secure Act 1.0 and the Biden era in Secure Act 2.0 failed to increase savings for households who are struggling to save.

·      Republicans have successfully blocked most of Biden’s efforts to provide student loan relief. Many of the Biden-era programs fail to provide relief to some overextended borrowers and are costly to taxpayers.

·      The Republicans would move us backwards by repealing the ACA.  The Biden Administration has failed to address the myriad health care problems that exist despite enactment of the ACA.

·      Neither President Biden nor former President Trump appear keen on quickly addressing the pending shortfall in the Social Security Trust fund and preventing future automatic benefit cuts.  Both Republican and Democrat proposals to address this problem are likely to garner bipartisan support.

·      Both President Biden and former President Trump have failed to address the rise in the national debt and have over relied on temporary tax provisions, which create substantial economic uncertainty.

The decision by President Biden to drop out of the race creates an opportunity for a new Democrat standard bearer to present new solutions to economic problems.

This memo offers potential policies that would address five current problems -- (1) low levels of household savings, (2) high student debt burdens, (3) inadequate or incomplete health insurance coverage, (4) automatic Social Security benefit cuts, and (5) a ballooning national debt.

The Democrat replacing President Biden on the ticket could offer something neither President Biden nor former President Trump could provide – the possibility of meaningful change.

Economic Priorities for the Post-Biden ERA

The most urgent and potentially most transformative issue facing the next President and the next Congress involves the prevention of automatic cuts to Social Security benefits.  However, this problem cannot be resolved in a vacuum.

Many workers nearing retirement do not have a substantial amount saved for retirement.  Many younger workers saddled with substantial student or medical debt are finding it difficult to increase household savings. Any Social Security reform proposal should reflect the need to also improve household savings by households currently unable to save.

Adjustments to the Social Security system have a direct impact on the growth of the national debt while the current high and increasing national debt complicates efforts to maintain current benefit levels.

Efforts to increase private savings and the barriers impeding the ability of many workers to save are a prerequisite to many Social Security and national debt reform proposals.

Priority One:  Improving Household Saving:   Despite a relatively robust economy with a low unemployment rate and a declining inflation rate, many households are having a hard time savings.  Around 37 percent of American households could not cover a $400 emergency expense and many workers nearing retirement have very little in retirement savings.

Efforts to increase private saving rates have not been a high priority of the Biden Administration or recent Congresses.    The recently enacted changes to 401(k) plans in the Secure Act 2.0 did very little to increase savings by low-income and middle-income households that are having the hardest time saving for retirement.

Two prominent economics, Alicia Munnell and Andrew Biggs, is ineffective and could be redirected to address the Social Security shortfall.  Part of the policy discussion should involve ways to increase retirement savings for low-income and mid-income households.

The proposed policy changes include: 

·      Reductions in the total amount people can contribute to 401(k) plans and employer matching funds to 401(k) plans to allow for more effective tax incentives.

·      A tax credit instead of tax deductions for contributions to IRAS and/or Health Savings Accounts for low-income and middle-Income households.

·      Allow employers to make matching contributions to an employee’s or contractor’s IRA instead of the firm-sponsored retirement plan.

·      Abolish the use-or-lose rule governing contributions to flexible savings accounts.

·      Change tax rules to allow for IRA contributions by households with access to 401(k) plans.

·      Require automatic rollovers from 401(k) plans to low-cost IRAs for workers making job changes.

·      A rule change governing disbursements from both 401(k) plans and IRAs prohibiting the withdrawal of 40 percent of all contributions until after age 59 ½.

Priority two:  Reducing Student Debt Burdens

The current cohort of students is taking on more student debt than previous cohorts.  The high debt levels prevent many households from saving for basic liquidity, retirement or for a home purchase.  President Biden has attempted to forgive student debt burdens but some of his approaches have been rejected by the court or have been proven ineffective.  Go to this memo for a discussion of President Biden’s student debt relief efforts and potential modifications.

A Democrat alternative to the Biden approach to student debt relief would include both modifications of the standard loan contract and modification of IDR loan contracts.

·      A modified standard student loan contract would eliminate all interest charges 20 years after initiation of repayment and increase collection efforts on the outstanding balance at maturity.

·      The modified IDR loan contract provides partial loan discharges earlier in the life of the loan, elimination of interest at maturity, and better collection efforts on unpaid balances.

These alternative student debt relief measures would incentivize borrowers to reduce the amount they borrow, would be less costly to taxpayers, and would be easier and less costly to administer than current student loans.

Priority Three:  Expanding and Improving Health insurance Coverage

The ACA did initially substantially reduce the number of uninsured, however, around 10 percent of the population remain uninsured in 2022.

Despite the ACA and recent efforts by the Biden Administration many people have inadequate health insurance coverage.  Remaining problems include – (1) lack of an affordable health insurance option (2) loss of health insurance for unemployed workers and people during job transitions, (3) high out-of-pocket costs, (4) unresolved surprise medical bills, and (5) lack of access to specialists for people with narrow health plans.

Potential solutions to these problems include:

·      Creation of a low-cost hybrid private/public health insurance option that provides for automatic access to Medicaid after enrollee reaches the annual cap on expenditures

·      Tax subsidies and an adjustment to the premium tax credit designed to promote employer subsidies of state exchange health insurance.

·      Abolish the use-or-lose rule governing contributions to flexible savings accounts.

·      Modification of rules governing contributions to health savings accounts and high deductible health plans.

These unresolved health care problems and potential solutions are described in more detail in the essay ACA 2.0.

Priority Four:  Stabilize the fiscal process and control the growth in the national debt

The Republican party has enacted unsustainable tax cuts and the Democrat party has enacted ambitious spending plans.  Chaotic budget debates and the use of provisions which sunset tax and spending programs create substantial economic uncertainty for the economy as a hold and specific taxpayers.  Go here for a discussion of the impact of expiration of both Trump-era and Biden-era tax cuts.

The fiscal approach for a post-Biden Democrat would attempt to reduce the use of tax provisions that automatically expire on a particular date.  Specific changes to the tax code include:

·      Small permanent increases in the personal tax rate and the corporate tax rate.

·      A permanent stable tax policy for both estate taxes and the childcare tax credit.

·      Increase in childcare tax credit could be reduced if SNAP benefits, Medicaid expansion are made permanent and other saving and health care tax reforms are enacted.

·      Earmarking some revenue from new taxes to the Social Security Trust and Medicare Trust fund.

Priority Five: Preventing Automatic Benefit Cuts to Social Security

The most recent report issued by the trustees of the Social Security Trust fund states absent changes in policies Social Security benefits will be automatically cut by 17 percent in 2033. 

The cost in addressing this problem would be reduced if policymakers made changes to future benefits can current revenues at an earlier date but neither President Biden nor former President Trump are keen about moving quickly on this issue.

Traditionally Democrats advocate Social Security rescue plans involving increased taxes (see the approach offered by Bernie Sanders) while Republicans argue for future benefit cuts (see article on Haley’s position, a position which was attacked by both Trump and DeSantis

An alternative more realistic plan would recognize that fixing Social Security requires changes to both revenue and taxes.  Key features of this plan include:

·      The early retirement age for Social Security benefit would be increased by one month every two years until the early retirement age reached 63.

·      The retirement age for full Social Security benefits would increase by one month every two years until the full retirement age reached 66.

·      The balance on inherited 401(k) plans and IRAs over $100,000 would be taxed at a 2.0 percent rate with all revenue from the tax earmarked to the Social Security and Medicare Trust funds.

·      The ceiling on Social Security wages subject to taxes would be increased by 10 percent.

·      A portion of Increased revenue from an increase in the marginal tax rate and the corporate tax rate will be earmarked for Social Security. 

The approach offered here differs from the approach preferred by the progressive wing of the Democrat party, which relies exclusively on tax increases.  It is important to limit tax increases for Social Security because additional tax increases are likely needed to reduce annual deficits.

The impact of the gradual increase in the retirement age will be offset by the gradual increase in private retirement savings from the other policies outlined above.