“When there’s an elephant in the room, introduce him.”
— Carnegie Mellon University professor Randy Pausch
OK, I’ll do it.
The elephant in the room is our country’s national debt. There, I’ve said it.
In March 2024, the public debt of the United States was $34.5 TRILLION — that’s $34,500,000,000,000. Up more than $3 TRILLION from just a year earlier.
Interest on the debt is currently the fastest growing part of the budget — nearly doubling over the past three years — and more than our county’s defense budget.
Over the past half-century, both political parties have been on a spending binge — with government spending exceeding government revenue.
We’ve had a balanced budget only twice: President Lyndon Johnson did it in 1969 and President Bill Clinton from 1998-2001.
But elected officials in Washington, D.C., remind me of MAD Magazine’s famed Alfred E. Neuman: “What, Me Worry?”
What the heck, we can always print more money! But are we reaching a tipping point?
Economists suggest there are two ways to deal with unsustainable government debt.
A recent Wall Street Journal article noted two options:
- An orthodox approach is austerity and reform — cutting spending to live within our means and slowly pay down debt
- An unorthodox approach of default, inflation or financial repression — a path often followed by third-world countries
Just thinking about the damage caused by hyper-inflation and/or debt defaults in countries — including Mexico, Argentina, Greece, Iceland and Russia — is scary.
And one of our country’s most valuable assets is our reputation as the world’s reserve currency, making default on our debt unimaginable.
So, it would seem our only choices are to keep kicking the can down the road, or facing reality and making some tough decisions.
Recent Vanguard research suggests “the window for governments to act on this is closing fast. It’s an issue that must be tackled by this generation, not the next.”
And as you know from your own home/business budgets, that means cutting spending and/or increasing income.
One of the biggest problems is that both options appear to be political suicide for elected officials who are always running for re-election. Voters want “free goodies and low taxes,” and politicians want votes.
Nearby are two Congressional Budget Office charts showing the federal budget in fiscal year 2023 that tell the story pretty simply:
- Total Outlays: $6.1 Trillion
- Total Revenues: $4.4 Trillion
- Annual Deficit: $1.7 Trillion (6.3% of GDP)
Cautioning that federal spending had a way of getting out of control, the late Sen. Everett Dirksen, R-Ill., reportedly observed “A few billion here, a few billion there, and pretty soon you’re talking real money.”
Clearly that was many years ago, as today’s conversations are in trillions of dollars, not mere billions.
Add interest on the debt that’s approaching $1 trillion, and the national debt rises almost $3 trillion this year alone.
And keep in mind that some of the very low interest rate debt issued over the past decade will roll over at higher rates, assuming the Federal Reserve continues its inflation fight.
It’s worth remembering Albert Einstein’s quote about compound interest being the eighth wonder of the world: “He who understands it, earns it … Ge who doesn’t, pays it.”
By 2034, the gross federal debt of the United States is projected to increase by $21 trillion to about $54 trillion.
And as debt levels rise and deficits need to be funded by the U.S. Treasury, bond holders may well begin demanding higher interest rates.
Because cutting costs (benefits to taxpayers) is so tough, a natural reaction of government to solve budget shortfalls is to attack the revenue side of the equation by raising taxes.
However, substantial tax increases can discourage work, saving, investment and innovation. At some point, higher tax rates can actually reduce total tax revenue.
In his 1886 book, The Wealth of Nations, philosopher and economist Adam Smith noted that “high taxes, sometimes by diminishing the consumption of taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes.”
More recently, economist Arthur Laffer built a model that came to be known as “The Laffer Curve,” which demonstrated similar results.
So, while some tax increases might be successful in adding to total government revenues, there are likely practical limits to this side of the equation.
Which leaves cost cutting as the primary tool for trying to balance the budget — and, hopefully, even provide for debt reduction.
Let’s look at U.S. government spending for fiscal year 2024 to see where the money goes:
What would you cut? Note that “mandatory” budget categories total more than 70% of the budget, so less than 30% is discretionary without major legislative changes.
Cutting defense spending from 13% in today’s rocky geopolitical environment seems unwise, and many are calling for higher defense spending to protect our nation.
The 15% left for nondefense discretionary spending includes money for veterans’ health care, education, transportation and other health-care programs.
We would have to cut 40% of all discretionary nondefense spending to eliminate the deficit, and, folks, that just isn’t going to happen.
So, the obvious place to look for budget cuts is nondiscretionary — “mandatory” — spending, which means ENTITLEMENTS that account for 72% of the total budget.
Tackling that, my friends, is going to be remarkably tough sledding. But something HAS TO BE DONE.
Social Security not only represents 22% of our national budget, but the latest official projections show that trust funds will run out in 2034 — a mere 10 years from now.
At that point, it is projected that all beneficiaries (regardless of age) will face an immediate 20% benefit cut.
When started in 1935, Social Security was intended to provide a floor of protection and average life expectancy was just 62 years.
With an age 65 start date, very few were expected to collect the modest benefits — and certainly not for very long.
Today, life expectancy is 76 and the maximum normal retirement age benefit is $3,822.
Actuaries believe there are several ways to “fix” Social Security:
- Increase the retirement age. Raising the normal retirement age to 69 and then indexing it to longevity is estimated to close the funding gap by 38%.
- Modify cost of living adjustments. This could close the funding gap by 18%-40%, depending on the change.
- Slow initial benefit growth. Slowing growth for the top 70% of earners would close the gap by an estimated 55%, and leave growth unchanged for the bottom 30% of earners.
- Increase the Social Security Wage Base. Raising the taxable share to 90% of earnings is projected to raise $679 billion. Subjecting earnings greater than $250,000 to payroll taxes would generate savings of more than $1.2 trillion.
- Combination. Making multiple changes would further reduce the funding gap and could, in fact, reduce Social Security’s budget costs.
Medicare is a more difficult challenge than fixing Social Security. Like Social Security, Medicare’s trust fund for Part A is expected to be depleted by 2026. Medicare Part B and Part D are funded by beneficiary premiums and general tax revenue.
- Raise the eligibility age, in a similar story as Social Security. The CBO estimates that changing the eligibility age from 65 to 67 would cut billions of dollars from the federal budget deficit. Even more savings if changed to an even older age.
- Premium costs for participants could be raised across all income brackets.
- Medicare payroll tax rates could be increased.
- Cut and/or control benefits more closely.
Important note: These changes would not impact current program beneficiaries, but rather would be implemented for future beneficiaries.
But it’s time for our country to live within our means with a balanced budget to at least freeze the national debt and, hopefully, begin shrinking it.
While there are many places for cuts, entitlements are clearly “the elephant in the room.” Social Security and Medicare are both running out of money, so the problems will get worse, and we shouldn’t just be ignoring things.
Politicians seem to be more worried about re-election than dealing with these difficult problems.
We need to have serious conversations about this, and make some tough — and almost certainly unpopular — decisions. We owe it to our kids and grandkids.
But as Winston Churchill once said, “You can count on Americans to do the right thing—after they’ve tried everything else.”
It seems like we’ve tried everything else. Now it’s time to do the right things.
