The Economy

PSA: We’re Still Going Bankrupt

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Entitlement trust funds are running out and the debt is exploding.

The folks at the Committee for a Responsible Federal Budget have long been the party poopers of the D.C. policy world.

When Republicans get all juiced up about cutting taxes, the CRFB points out that they’re adding to our already unsustainable deficits. These days, though, it’s Democrats, still high off the thrill of passing a $2 trillion “COVID-relief” bill that wasn’t all that dedicated to COVID relief, who look at our current budget situation and think the numbers aren’t out of whack enough. They’re currently working toward another multitrillion-dollar spending binge.

Naturally, the CRFB saw this as a good time to put out a detailed report about how four of the government’s major “trust funds” are spiraling toward bankruptcy, along with some options for fixing the situation. Spoiler alert: Any solution will involve tax increases or program cuts, so there are no political wins to be had here.

The trust funds at issue include two for Social Security (old-age benefits and disability), plus one for Medicare (Hospital Insurance, or Part A) and one for highways. These funds hold the receipts from taxes meant to support their respective programs.

The rest of the government often “borrows” this money, leaving behind IOUs that have to be repaid out of general revenue or new debt, which can make the trust funds something of an accounting fiction. But something important happens when the funds run out: The programs’ benefits automatically get cut so that their spending doesn’t exceed the revenue coming in.

All four funds will run out of money within the next 14 years; the highway and Medicare Hospital Insurance funds will be gone within five. Per the CRFB, “Insolvency would trigger a 7 percent cut to disability benefits, a 13 percent cut in Medicare payments [to health-care providers], a 25 percent cut in highway spending, and an abrupt across-the-board 27 percent cut in Social Security retirement benefits.”

Fixing the problem isn’t that hard in theory. Revenues aren’t covering spending, so we need to boost the former, cut the latter, or implement some combination of the two. The CRFB even has some new suggestions for the Medicare and highway funds.

But doing so is very hard in practice. These are popular programs, so no one wants to see them cut. Tax increases aren’t a big hit either — and Biden’s team seems intent on hiking a lot of taxes to fund the new spending binge, which cuts into the resources available to tax for other reasons. Meanwhile, Biden has promised not to hike taxes on “anyone” making under $400,000.

Perhaps the Highway Trust Fund will be the easiest to handle, at least in the short term. Congress needs to pass a new highway bill by October, the fund is running out so soon that we can’t delay, and infrastructure is on the agenda anyhow. On the other hand, Biden is reportedly unwilling to raise the gas tax, because it would violate his pledge.

And Social Security and Medicare reform? Forget it. It’s most likely that we’ll deal with those when we absolutely have to, and delay as long as we can by funding the programs’ shortfalls with borrowed money.

Of course, these programs’ dysfunctions have a lot to do with the sorry state of our overall budget situation. Earlier this month, the Congressional Budget Office updated its “long-term budget outlook,” predicting that our debt will be 102 percent of our gross domestic product by the end of this year — and 202 percent by 2051. “Debt that is high and rising as a percentage of GDP,” the CBO noted, “boosts federal and private borrowing costs, slows the growth of economic output, and increases interest payments abroad.” “A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets.”

The two biggest culprits: Health-care programs (including Medicare, Medicaid, and Obamacare), and interest on the debt we keep building up. Social Security spending will keep rising, too, as the Boomers continue to retire. Here’s a chart; bear in mind that the CBO assumes Congress will keep funding Social Security and Medicare when their trust funds run out.

The sooner we act, the easier it will be to change course. But our last president won election vowing to leave the major entitlements alone, and the current one is too busy blowing trillions of dollars on new projects to worry much about the old ones.

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