Earlier this year, President Barack Obama formed a committee whose goal was to craft solutions to reduce the federal deficit.
The committee was designed to be bi-partisan (consisting of both Republicans and Democrats) who would propose some unpopular legislation that would bring down the government’s ever-increasing budget deficit.
The committee is supposed to present its report on Dec. 1. However, many ideas being proposed have leaked out during the past few months, and yesterday there was an avalanche of new information about possible measures.
The main ideas being proposed include cutting Social Security and Medicare, raising the retirement age, reducing military spending and ending the mortgage-interest deduction.
I do not have enough space to cover all aspects of the plan but I will focus on two points in particular.
The good news and the bad news …
Raising the retirement age is an absolute necessity. When programs like Medicare and Social Security were implemented, it was assumed people would retire at 65 and die at 70. Now, life expectancy has increased to more than 78. Thanks to increases in science and medicine, children born today will likely live much longer than their parents or grandparents did.
The real disappointment with the plan is that it only proposes raising the retirement age to 68 by 2050 and 69 by 2075. This is an absurd timeframe considering how long people are currently living, and because this will not help the deficit in the near term.
In addition, it is very hard to predict what life expectancy will be in 2075. For all we know, it could be 150 or even 200 by then. The commission must raise the retirement age with a much closer date in mind.
The good news is the proposal to eliminate the mortgage-interest deduction.
The current deduction which the government allows is merely an attempt to prop up the housing market. We all know from the financial crisis that the government’s role in propping up Fannie Mae and Freddie Mac was an absolute disaster.
While almost all private companies have recovered from the financial crisis (at least the ones that have not gone bankrupt) and repaid the government for any funds received, Fannie Mae and Freddie Mac have borrowed, and are expected to continue to borrow, hundreds of billions of dollars from the federal government. The bottom line is the government has no role in the housing market.
Eliminating the mortgage-interest deductions will partially complete this task.
In addition, the move is expected to raise billions of dollars in revenue (which hopefully will be used to reduce the deficit and not fund more wasteful government spending).
However, it is extremely unfair to current homeowners to immediately implement this plan. In addition, the housing market is currently very weak and implementing this plan could be a catastrophe for the housing market.
A fair and prudent way to go about this would be to delay any implementation until the housing market recovers. To make it fair to current homeowners, the deduction should not be eliminated in one swift action, but rather slowly over many decades.
The plan has good and bad aspects.
However, the important thing is that it appears the government is finally starting to pull its head out of the sand.
Hopefully, our politicians will have the political will to go along as well.
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