In a previous post, I outlined the causes of our existing national debt, which now stands at $40 trillion. Here, we will look into the not-so-bright future to identify what will cause the debt to multiply many times over in a few short decades.
The Congressional Budget Office (CBO) annually publishes a long-term budget outlook that forecasts the next 30 years under current law. It must be stressed that these projections represent a baseline that is almost certainly too optimistic. They assume no future wars, recessions, tax cuts, or new spending programs, and that interest rates on the debt will remain historically moderate forever. Because all of these assumptions are likely wrong, actual debt will be much higher than estimated. This is why CBO reports for the past quarter-century have been wildly optimistic compared to what really happened.
With that in mind, let’s examine the CBO’s rosy long-term projection.
From 2026 to 2056, the agency estimates that public debt as a share of the economy will rise from 101 percent this year to 175 percent, or $168 trillion in dollar terms. (Now $40 trillion doesn’t seem so bad, does it?) That is the result of annual deficits — the difference between federal spending and revenue — rising from 5.8 percent of GDP to 9.1 percent.
Almost all of the increase in deficits comes from higher interest payments to bondholders, which, in turn, accrue higher interest when added to the debt. Interest is not an optional spending category that can be adjusted at will; it is determined mathematically and must be paid in full, lest the government catastrophically default on its debts. By 2056, we are projected to spend more on interest than any other budget item.
What fuels the underlying debt growth — and thus much of our interest spending — is a structural mismatch between federal revenues and spending on programs. Start with the former: Even after recent tax cuts, revenue as a share of GDP is projected to rise modestly from 17.5 percent to 18.8 percent, primarily due to rising incomes pushing further into higher tax brackets. (Of course, without tax cuts, revenue over this period would be greater than projected.) Again, though, the baseline is overly optimistic, as it assumes certain tax cuts set to expire aren’t extended by Congress and that elevated tariff rates (calculated before the Supreme Court decision) survive beyond Trump’s presidency. Neither assumption is a good bet.
The spending side is where things get terrifying: Total outlays are projected to expand from 23.3 percent of GDP to 27.9 percent. But some categories are projected to get more manageable. Discretionary spending, which includes both the U.S. defense budget and all non-defense programs budgeted by Congress each year, is set to shrink as a share of the economy. “Other mandatory” spending — most means-tested welfare programs, veterans’ benefits, and federal employees’ retirement costs — will also decline relatively.
Besides interest costs, that leaves the big-ticket items responsible for yawning deficits: Social Security, Medicaid, and, the biggest grower by far, Medicare. Social Security costs will balloon as Baby Boomers finish retiring, then plateau around 6 percent of GDP. Medicaid and related health-care spending (coverage for low-income children and Obamacare premium subsidies) will stay put at 2.6 percent. Medicare, meanwhile — driven by surging senior enrollment, medical prices, and the addition of new treatments most of all — will rise from 3.3 percent of GDP to 5.5 percent.
In plain English, structural shortfalls in just the two programs for America’s elderly, Social Security and Medicare, are projected to make up the entirety of long-term deficits. There can be no answer to the debt problem without reforming these twin entitlements. Any serious effort would involve significant reductions in what near-future Social Security beneficiaries receive and greater cost-sharing for even current Medicare enrollees. Cutting other spending and raising some taxes would also have to be on the table.
Or, we will continue to barrel into the most predictable fiscal crisis in history, most likely resulting in European-style wage and consumption taxes on everyone for no benefit other than preventing a global financial meltdown. Either that, or we suffer high inflation in perpetuity from monetizing the debt. There is no way out of paying for profligacy.
The choice is up to us, but not for that much longer.