A news alert for the Debt Paying Generation: President Obama’s budget for Fiscal Year 2012 brings the national debt from $14.1 trillion to nearly $26.4 trillion by 2021. This will take the amount of debt per working American by the end of this fiscal year — all 153,000,000 of them — from $101,150 to more than $161,631. Young Americans are going to get hammered by this debt if entitlement, welfare, and defense reforms are not under way within the next two to five years.
Those 115 million Americans between 5 and 30 years old are going to have to absorb virtually all of this debt. In earlier pieces, we outlined our take on the matter, and how few members of Congress are willing to stand up for the interests of the under-30 generation. Today, we’d like to highlight a warning from the International Monetary Fund (IMF), which has been sending warning shots across our bow for almost a year, and just the last January released yet another report warning of economic pain and disruption for Americans if we don’t get our debt under control.
Of the several studies released by the IMF, the most important was a May 15 report warning the United States that it would have a debt-to-GDP ratio of 100 percent by 2015. An April 30 report also found that of all the debt reductions industrialized nations need to make, the United States requires the second-largest adjustment. This adjustment amounts to full 12 percent of our structural deficits — not quite as bad as Japan at 13 percent, but considerably worse than woeful Greece at 9 percent. Yet Congress will probably not be able to enact these necessary changes.
In order to achieve that 12 percent reduction during the five fiscal years between now and 2015, the average budget cut would have to be equal to equal $395.3 billion per year. Given that the president’s bipartisan debt commission’s recommendations could not even get to Congress for a vote, and that the new budget from House Republicans cuts only $61 billion from 2010 spending levels, how can the American people expect real structural change in the federal budget? Members of the Debt Paying Generation certainly cannot, and rightfully should ask if they will be left holding the bag.
And there’s more than IOUs in that bag. A much weaker economy is part of the burden, too. According to Claudia Reinhart and Hugh Rogoff, authors of the best-selling This Time is Different: Eight Centuries of Financial Folly, countries that amass public debt above 90 percent of GDP inevitably experience sharply slower economic growth and usually debilitating inflation. That means that the Debt Paying Generation could end up with lower incomes and devalued investments while bearing the biggest debt burden in human history. Say hello to virtually no savings and no retirement.
Implementation of the IMF’s recommendations will be next to impossible, for either political party, if the last ten years are any example. With the president’s 2012 budget proposal out but not yet fully analyzed, we decided to put the IMF’s recommendations into real terms based upon the president’s initial 2011 budget proposal. If Congress were to enact the IMF recommendations, it would have to make cuts amounting to 72 percent of defense spending or 145 percent of the president’s proposed Medicaid spending every year through 2015. Or Congress could just eliminate the entire discretionary budget, all of Social Security, and spending equal to two-thirds of our national-debt interest payments for FY 2011 to reach the same total cuts this year, and leave the budget in other years untouched.
It’s time for Americans to step up and place blame squarely on ourselves both for electing ineffective leaders and for not knowing where our tax dollars are going. Approximately 41 percent of the president’s original 2011 budget is taken up by Social Security, Medicare, and Medicaid, programs that this nation can’t afford but that huge majorities of Americans don’t want changed. The program Americans most want to cut? Foreign aid, which amounts to less than 2 percent of federal spending — just $38 billion dollars out of a budget nearly $4 trillion in size.
In order to lift ourselves out of this hole, Americans will need to make tough decisions. Because mandatory spending and defense make up more than 65 percent of the federal budget, reforming entitlement programs for the elderly and indigent, and bringing much needed efficiencies to the Department of Defense, must be undertaken now. Otherwise, the Debt Paying Generation will experience a significant level of financial insecurity. For example, it is widely believed, with good reason, that Americans under 30 are never going to collect any Social Security or Medicare, despite government promises to the contrary. How unfair is it, then, to add insult to injury by loading them down with thousands in additional taxes throughout their lives to repay the policy-driven debts of their parents’ and grandparents’ generations?
We hope the new Congress will address these problems before they hit critical mass in the next two to five years However, history suggests otherwise, and the inertia of the past bodes poorly for the Debt Paying Generation. If Congress does not take seriously the fiscal realities that the IMF has highlighted, young Americans almost certainly will suffer under a lifelong recession.
— William Beach is director of the Center for Data Analysis at the Heritage Foundation. Dustin Siggins is a former policy researcher in the Center for Data Analysis at Heritage.