Trending stories recently have included foreign policy, airplane safety and Michael Pompeo’s likelihood of becoming secretary of state. Less has been reported about the just released Congressional Budget Office report that forecasts an explosion of federal debt to levels far greater than seen in any year since the end of World War II.
In the immortal words of Capt. Louis Renault of “Casablanca” fame, “I’m shocked.”
Yet, our elected officials seem reluctant to do anything, and the American people are mostly silent on the subject. Why? Perhaps because the solutions are simply too unpalatable for any of us to consider.
The Budget and Economic Outlook: 2018 to 2028 only confirms what the U.S. Department of the Treasury said in its 2017 financial report of the U.S. government released in February and, indeed, has been warning for at least the past decade. Owing to its mounting debt, the federal government is becoming fiscally unsustainable. Both the CBO and the Treasury (with some differences in their forecasting windows and methods) place the federal debt somewhere between 74 percent and 95 percent of gross domestic product by 2027.
Current spending is a relatively small part of the problem. It is interest on borrowing that is driving the debt into the stratosphere. Large deficits force the government to borrow even more, thus increasing the debt. And an increase in the debt pushes interest costs even higher in a vicious cycle. How vicious? The Treasury reports estimate that by 2092 the debt-to-GDP ratio would increase to 297 percent – a ratio that virtually no economist believes is endurable.
Let’s assume that Congress is not about to reverse itself and raise personal or corporate income taxes. That means we must cut expenditures. Unfortunately, 78 percent of the budget is consumed by defense, veterans benefits, interest and entitlements (such as Social Security and Medicare), all of which are considered, for practical and political reasons, immune from cuts.
Reductions in the remaining 22 percent of programs may make us feel thrifty but will do little to reduce annual deficits. For example, eliminating the entire State Department, including all the foreign aid that it dispenses, would reduce the federal budget by less than 0.6 percent.
Members of Congress may question the nondiscretionary status of entitlements, and consider Social Security to be the low-hanging fruit of budgetary reform. Social Security is currently a money-losing operation in that benefit payments exceed Social Security payroll taxes and are expected to do so for the indefinite future. Although Social Security is backed by a trust fund, accumulated over the years when payroll taxes exceeded benefits, the fund is forecast to be depleted by 2034. When that occurs, if there is no change in the law, benefit payments will have to be reduced to about 77 percent of what is promised.
But there are only two ways to reform Social Security – either increase the payroll taxes or decrease the benefits. Neither course is socially desirable or politically practical.
Revenue from payroll taxes can be increased by either raising the tax rate (currently a combined 12.4 percent on employer and employee) or raising the cap on the amount subject to tax (currently $128,700). The payroll tax, however, is decidedly regressive and therefore the burden of any increase in rate would fall mainly on the lowest-earning workers. Raising the cap makes more sense but would raise the taxes of workers who consider themselves “middle class” – those to whom Congress has just granted a tax cut.
Reducing benefits would be even more unpopular and would hurt the most fiscally vulnerable. According to the Social Security Administration, more than 60 percent of aged beneficiaries receive at least half of their income from Social Security. Shockingly, for 23 percent of aged beneficiary married couples and 43 percent of nonmarried beneficiaries, Social Security provides 90 percent or more of their income. Social Security is what puts food on the table.
The latest reports from the CBO and the Treasury remind us of the lessons that we try to instill in our children: You can’t always have everything you want – in this case, a strong military, a solid social network, low taxes and a fiscally sound federal government.
What are we willing to sacrifice?
Michael Granof is the Ernst & Young Distinguished Centennial Professor in Accounting at the McCombs School of Business and the LBJ School of Public Affairs at The University of Texas at Austin.
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