The United States could lose its top credit rating for the second time from a leading credit agency if there’s a delay in raising the country’s debt ceiling, Fitch Ratings warned Tuesday…
“The pressure on the U.S. rating, if anything, is increasing,” David Riley, managing director of Fitch Ratings’ global sovereigns division said at a London conference. “We thought the 2011 crisis was a one-off event …. if we have a repeat we will place the U.S. rating under review.”…
Riley warned that the different arms of the U.S. government still have a number of issues to address. As well as increasing the debt ceiling, they have to agree to spending cuts that were delayed as part of the ‘fiscal cliff’ agreement and back measures to avoid a government shutdown, potentially in March.
For the first time since Social Security’s cash crisis in 1983, the program can’t afford to pay full benefits for its youngest crop of new retirees through life expectancy, government data show.
The hastening of the Social Security Trust Fund’s demise to 2033 means that workers just becoming eligible for Social Security at age 62 face steep future benefit cuts if they live to the average life expectancy, now about 84.
Those abrupt benefit cuts of about 25% a year for today’s 62 year olds and workers nearing the early retirement age would come at an especially bad time — late in life when savings have dwindled and health care bills are on the rise.
What’s more, according to AARP, health care costs are rising faster than wages. One study, done in conjunction with the Urban Institute predicts that the average retirement income will fall from the current 80 percent of average earnings, to 73 percent of earnings. When health care costs are figured in, it’s even worse. The study says that retirees will have to live on a budget that is just over half of what they made when they were working.
The study also predicted that middle-income retirees will rely on social security for about half of their retirement income. For low-income earners, social security will make of 69 percent of their retirement money. The average social security payment today is just over $13,000 a year.
Rejecting GOP ultimatums, Rep. Steny Hoyer (D-Md.) said Tuesday that new revenues must accompany spending cuts as Congress prepares to jump headfirst into a series of high-stakes budget debates…
Hoyer, the Democratic whip, said it’s “categorically not true” that the last deal takes new revenues off the table in the coming talks.
“I certainly reject it out of hand,” Hoyer said during his weekly Capitol press briefing. “You cannot get to where we need to get — to get our country on a fiscally sustainable path — without additional revenues.”
To avoid a crisis, taxes would need to start rising sharply in the middle part of this decade. The U.S. can support 3% budget deficits without a disastrous increase in debt, since the economy will potentially grow at that rate. So by the mid-2020s, we’d need to have a system in place that collects an extra 3 points of GDP in revenues. That’s the 25.5% spending rate, minus around 22.5%, approximately representing the 19.6% share of revenues plus the 3% deficit.
How big is that number? By 2028, it would total around $1 trillion. Raising an extra $1 trillion would require a 37% rise in income taxes. Hiking tax rates on anyone, high-earners or the middle class, won’t remotely collect that kind of money. Once again, the 19.6% of GDP is about the limit of what the current tax system can provide, given that marginal tax rates far higher than today’s have seldom collected more than that share…
If Washington gridlock persists, the big new tax is a virtual certainty. The most probable choice will be a VAT. Since the VAT is assessed on things people buy, not their incomes, it falls heavily on the middle class. Suddenly, the issue is sneaking into the fiscal debate. A January 7th editorial in the New York Times called for a VAT. The same week, in a piece criticizing the nomination of Jack Lew for Treasury Secretary, the Wall Street Journal editorial page groused that President Obama’s spending plans will saddle America with a VAT by default.
This isn’t what the middle class was promised. But the numbers, even assuming good days ahead for the economy, point inexorably in that direction. We don’t know what crisis will enable the phantom to take charge. But every day of inaction brings that crisis nearer.
[A]t a more elemental level, we need significant attitudinal change. Governments and legislators, for example, have to cease viewing public finances as a vote-attracting tool.
I’m afraid, however, that the bigger challenge may well be for ordinary Americans. To put it bluntly, we need to accept that our participation in democracy cannot degenerate into voting for whoever promises us the most stuff.
In short, if we’re unwilling to use our democratic freedoms responsibly, America seriously risks degenerating into what one German academic described in 2009 as the situation prevailing throughout much of Western Europe: “fiscal kleptocracy.” Citizens vote for those politicians who use state power to give their supporters what they want at other peoples’ expense.
Fiscally, that translates into tax increases, no substantial spending cuts, and a colossal debt-burden for our children.
Economist Herbert Stein observed that something that can’t go on forever, won’t. The United States can’t go on forever increasing its debt by 60% every four years. Therefore, it won’t. The only question is how things will stop — smoothly or catastrophically.
As we head into the next debt-ceiling debate, it’s worth considering these words from a patriotic senator concerned with America’s future:
“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. . . . It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”
The senator? Sen. Barack Obama, in 2006.
Some conservatives are convinced that this is the full emergence of Obama’s democratic socialism. This explanation is not required. Obama probably still views himself as a pragmatist. He may comfort himself that he will take incremental action on Medicare in due time. But at this moment three factors overlap: his liberal policy instincts, a political opportunity to break his opponents, and the massively inflated self-confidence produced by reelection. So, force the GOP to surrender on the debt limit, with nothing in return. Require Republicans to accept new taxes in exchange for any real spending reductions. If they agree, their caucus is fractured (again). And if they refuse (which they are likely to do), paint them as obstructionists and extremists who are willing to destroy the economy/the nation’s credit rating/the military for their own ideological purposes.
There is one main downside to this approach. It delays any serious action on long-term debt for at least another two (and probably four) years. It is the path of a government that moves from fiscal crisis to crisis, gradually undermining global confidence that it can manage its own affairs. An economy in which uncertainty, slow growth and high unemployment become norms. A federal budget increasingly devoted to entitlements at the expense of other purposes, including defense — eventually undercutting our international influence in the same way that Europe has become depleted, insular and toothless.
Obama’s short-term political calculations are understandable. It is the cost to posterity that is unreasonable.
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