This year, for the first time since 1982, benefits and administrative expenses are projected to exceed total income. As a result, the program will begin dipping into the reserves in its trust fund. That fund has a $2.9 trillion surplus collected when revenue — most of it from payroll taxes paid by workers and their employers — exceeded costs. The fund will be depleted by 2034, according to the latest annual report from the agency’s trustees. That’s when benefits would fall by 21 percent for everyone.
The shortfall is largely a product of demographic shifts: A large number of baby boomers are collecting Social Security, a declining birthrate is producing fewer workers to pay taxes into the system and retirees are living longer.
At AEI, Yuval Levin and James C. Capretta warn that entitlement spending will lead to major budget problems.
The consequence of this bipartisan determination to borrow and spend is a fiscal outlook that has never been more dire. The Congressional Budget Office (CBO) projects the federal government will begin running annual deficits exceeding $1 trillion in 2020 and run a cumulative 10-year deficit of $12.4 trillion from 2019 to 2028. These large deficits are on the order of those racked up immediately after the Great Recession, but they are now in the offing when the economy is strong, employment is high, inflation and interest rates are low, and the business cycle is likely near its peak. If we faced another recession today, we would be starting from a baseline of extremely high deficits and growing them further.
We also confront these projections just as the aging baby-boom generation begins to exert maximum pressure on entitlement spending. CBO projects that under plausible assumptions (such as permanent extension of the 2017 tax cuts), the government’s cumulative debt will grow from 78 percent of GDP this year to 148 percent in 2038 and to 210 percent of GDP in 2048. Debt at such high levels would be unprecedented in the nation’s history (let alone in peacetime), and if CBO’s assumption that we will face no major wars or severe economic crises in this period should prove too rosy, then the debt will only grow higher. In 2008, before the full effects of the financial crash had driven up federal spending and suppressed tax collection, federal debt stood at 39 percent of GDP.
There is a broad consensus among economists that large and persistent deficits slow economic growth by lowering savings and investment. Workers are less productive than they would be otherwise and have lower incomes. In fact, the recent run of stagnant wages is likely owed in part to inadequate investment in productivity growth due to high deficits, and thus low national savings rates, over many years.
Large and persistent deficits also raise somewhat the risk of a genuine economic crisis. It is easy to become complacent about this threat, given the size and strength of the U.S. economy. But there’s no way to predict what would happen if America’s public finances remain on their current course, which is far out of line with historical experience. Countries get into trouble when servicing their debts becomes near-impossible given the size of their governments’ other commitments and the upper limit on revenue imposed by citizens unwilling to tolerate confiscatory tax rates. The United States is likely to have more room for borrowing without facing these most dire consequences, but no one can know for sure just when its luck will run out. Once that invisible line is crossed, interest rates can spike, raising borrowing costs even more, which can quickly spark a serious crisis. It is one of the core responsibilities of public officials to avoid avoidable calamities and to refrain from creating risks of significant harm and disruption for citizens. Our leaders are failing miserably in this regard with respect to federal debt.