The impact of the 2022 mid-term on retirement

The 2022 midterm elections produced a surprise result, with Democrats retaining control of the Senate while Republicans won the House by narrow margins. This allowed the two parties to agree on a omnibus bill which authorizes $1.65 trillion in discretionary spending for fiscal year 2023. This comes after the largest post-war increase in federal spending in the 2020-2022 period (see table below)

Net federal spending as a percentage of gross domestic product, 1929 to 2022

Sources: OMB, St. Louis Fed

Normally, the lame session of Congress does not produce major legislation. However, he did this time: Democrats were motivated to strike a deal before Republicans took control of the House, and Senate Republicans did not want to face a government shutdown. House Republicans, however, were unhappy as they urged their Senate colleagues to vote against the legislation.

Buried in the more than 4,000 page report was an important provision that will help Americans save more for retirement, called Secure Act 2.0. It’s the biggest retirement bill in 15 years, and it’s aimed at low- and middle-income workers, those with student debt and those without a long-term retirement.

Like a Forbes Advisor As the commentary points out, the House version of the omnibus bill contained several provisions that would encourage people to save more. They included a requirement for employers with 401(k) or 403(b) plans to automatically enroll all eligible new employees at a 3% contribution rate that increases by 1% per year to a maximum of 10%. Other provisions allowed for larger catch-up contributions and additional assistance for student borrowers.

Congress was motivated to act because public confidence in retirement planning is waning. A BlackRock Survey found that 63% of participants last year believed they had enough savings, which was five percentage points lower than the 2021 survey results.

The move to Secure 2.0 represents a positive development for Americans looking to increase their retirement savings. However, it does not provide universal coverage for people who change jobs and lose coverage, and the effects will not be visible for a year or two as the pension industry prepares for its implementation.

So much for the good news.

The bad news is that a battle in Congress is brewing on social security, which provides a monthly income to 65 million people. Republican lawmakers have suggested that a vote on the federal debt ceiling could be used as leverage to push for changes to the program. It was not part of the omnibus spending bill, as Democrats believed the inclusion of the debt ceiling would hinder its passage.

Both sides agree that changes will eventually be needed to put Social Security, which accounts for 21% of all federal spending, on a stronger financial footing. The reason: As baby boomers retire and the population ages, the Social Security Trust Fund is expected to deplete reserves by 2034.

Democrats think the best way is to raise payroll taxes to pay for benefits. Rep. John Larson (D-CT), former chair of the House Ways and Means Social Security subcommittee, is proposing raising the salary cap to $400,000 from $147,000 while increasing benefits by an average of 2%.

Republicans favor a reduction in benefits. The Republican study committee suggested in a 2023 budget document that the normal retirement age at which people are entitled to full benefits be increased gradually to accommodate increasing longevity. The last such change took place in 1983, when the retirement age was raised from 65 to 67 over a period of 22 years.

Several other ideas have been floated that would change Social Security spending from being considered a mandatory expense to becoming a discretionary expense. One by Sen. Ron Johnson (R-WI) would require approval of Social Security clearances every year. Another by Sen. Rick Scott (R-FL) would cause all federal laws, including Social Security, to lapse every five years.

My take on what’s happening is that despite their philosophical commitment to smaller government, Republicans have been frustrated with the explosion in federal spending since the Covid-19 pandemic hit in 2020. Since then, 5 trillion dollars have been allocated to provide pandemic relief and an additional $1½ trillion was authorized for public works and social programs.

Over the previous three years, federal spending averaged about $4.5 trillion. It then jumped 45% in 2020 and has averaged nearly $6 trillion over the past three years. This allowed the federal budget deficit-to-GDP ratio to set a postwar record of 15% in 2020 and 12% in 2021. It has since fallen to around 6% of GDP in 2022, and CBO baseline projections see deficits of 4% to 6% over the next ten years. They are well above the post-war average of 3% and imply a steady increase in the stock of public debt relative to GDP.

With Republicans now in control of the House, they are able to block new spending initiatives and try to claw back spending on mandatory programs, which accounts for 70% of all spending.

However, aside from increasing the age required to receive full Social Security benefits, they are unlikely to prevail in rebranding it as a discretionary program. The reason: Social Security is a pillar of America’s social safety net, and changing it would risk incurring the ire of voters. In this regard, the anticipated wave of social security should dissipate as 2024 approaches.