How to pay for stimulus checks
The payments in the response to the coronavirus mark another instance of Congress voting to deliver money directly to households. The checks are poorly targeted to the task at hand, which is not so much to stimulate the economy, impossible when business is shuttered by state mandate, but to provide households in need with the resources to pay their bills and meet essential needs until the crisis passes. Like the rest of the Cares Act, what appears like a freebie is fully deficit financed. Dollars spent by the public sector must at some point be paid back by the private sector.
When Congress considers any next phase of economic responses by the government, it should consider targeted loans rather than grants for all. Despite current federal aid, some households may need more liquidity to maintain their standard of living or keep a small business afloat. However, many Americans hold little financial wealth or collateral, making it difficult to obtain affordable loans in private financial markets right now.
Yet there is already a significant pool of household assets that could serve as collateral for government loans to affected households, allowing them to borrow modest amounts at very reasonable interest rates. These assets are the $38 trillion in Social Security benefits that households accrued as of last year but have not yet received. Because these loans would be made by the federal government and collateralized with obligations owed by the federal government, interest rates could be much more favorable than a household or small business might find in the markets today.
Next time Congress wishes to provide cash to households, it should offer voluntary loan checks of a chosen amount like $5,000. Those who choose to receive a check would have that balance carried forward at a specified and favorable government interest rate until the time they choose to claim Social Security. The loan would then be repaid out of the very first Social Security checks that individuals would otherwise receive, after which their full Social Security check would be restored. Those who choose to receive no check would keep their Social Security retirement benefits completely unchanged. The delay that could be expected to repay a check of $5,000 would then be at most three months for the typical individual.
This addresses the weaknesses of blanket check grant programs. Those in need can access the funds, but the resources do not need to be spent on households that do not need them. The fact that the repayment period is on average quite long makes it possible to provide liquidity to households in the form of a loan without requiring repayment in the very short term. In contrast to massive federal granting of deficit financed checks, taxpayers only take the funds if they need them, and the taxpayers who receive the funds are to a very great extent the ones who pay them back.
Interest would start on the 20 year Treasury bond rate of around 1 percent and add an interest rate adjustment to account for individuals who will die before reaching the Social Security retirement age. Those loan recipients who survive to retirement would thus pay the cost for the recipients who do not, which we estimate would add around half a point to the 20 year Treasury bond base rate. This approach would have the plan be budget neutral while providing those who need loans with favorable terms.
The loan amount would in effect be drawn from the Social Security trust fund, but the interest rate is designed to fully reimburse the trust fund for the balance of the loan plus interest. While the balance would decline for each loan, the present value of the liabilities would also decrease, so the actuarial balance of the program would remain essentially unchanged. If avoiding optics of any acceleration of the trust fund depletion year were desired, the Treasury could credit the trust fund with Treasury bonds in the loan amounts, and the Social Security trust fund could “repay” the Treasury with interest upon the retirement of the individual.
So next time Congress truly wishes to provide cash to households with better targeting of funds and without increasing the federal deficit, we hope it will recognize that a voluntary loan repaid with a short delay in Social Security benefits would provide such extra liquidity without any worsening of the overall finances of the federal government.
Andrew Biggs is a resident scholar with the American Enterprise Institute. Joshua Rauh is a senior fellow for the Hoover Institution and the Ormond Family Professor of Finance at the Stanford Graduate School of Business.
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