The federal government is spending ever more money servicing an ever-larger debt pile. Are we headed for a crisis?
What does the U.S. owe?Â
The national debt stands at nearly $35 trillion, or more than $100,000 per person. The debt has climbed sharply over the past two decades — we owed $5.7 trillion in 2000 — with both Democratic and Republican administrations running budget deficits, meaning they spent more than they took in. This year, the deficit is on track to hit $1.5 trillion, about 5 percent of gross domestic product. Because interest rates were low and expected to stay low, many officials and experts thought the cost of servicing that debt would remain manageable. But the pandemic and the return of high inflation changed that thinking. To curb inflation, the Federal Reserve hiked interest rates from close to zero in 2020 to above 5 percent. Partly as a result, the government is for the first time expected to spend more this year on interest payments on the debt (about $870 billion) than on defense ($850 billion). If rates remain high, interest payments could reach $2 trillion a year by the end of the decade, consuming 30 percent of federal tax revenue. Payments on the debt would be the second-largest federal program, behind only Social Security. "We are in a spiral now — it's a slow spiral, but it's still a spiral — of rising debt and rising payments on the debt," said Phillip Swagel, director of the Congressional Budget Office (CBO). "The situation is unsustainable."Â
How did we get here?Â
Mostly it's because the government doesn't collect enough tax revenue to cover the cost of federal programs — a problem exacerbated by multiple rounds of tax cuts. The cuts signed into law by President George W. Bush in 2001 and 2003 have so far added more than $8 trillion to the debt, while the tax cuts passed under President Donald Trump in 2017 have added another $1.7 trillion, according to the Center for American Progress. Nearly $5 trillion in emergency pandemic outlays under Trump and President Biden further added to the debt pile. "The pandemic created enormous economic losses, and we used borrowing not so much to make the losses vanish into thin air but to spread them out over time," said former CBO chief economist Wendy Edelberg. Meanwhile, the costs of Social Security and Medicare — the top two government outlays — will rise as millions more Baby Boomers retire over the coming years.Â
Why is this a problem?Â
The bigger the deficit, the more bonds the Treasury must issue to cover otherwise unfunded spending — unfunded spending that now includes repayments for those bonds. There's a risk that investors could demand higher yields to buy the flood of government bonds, which in turn could push up borrowing costs on mortgages, credit cards, and business loans. Consumer spending and corporate investment would dip, slowing the economy and causing tax revenues to drop— requiring the government to borrow even more to make up the shortfall. New debt isn't the only problem. Over the next three years, more than half of the government's publicly held debt will mature and need to be refinanced at higher rates. And the more tax money that goes to debt servicing, the less there is for government programs that might boost growth, whether that's investment in infrastructure, health care, or anti-poverty measures. "We are paying for the past, not the future," said Tim Penny and David Minge of the nonpartisan Committee for a Responsible Federal Budget (CRFB).Â
How could we shrink the deficit?Â
Through a combination of tax hikes and spending cuts. "The middle class is going to have to contribute on the tax side or on the spending side," said Marc Goldwein of the CRFB. "There really is no path if they're not part of it." In his most recent budget proposal, Biden said he'd let Trump's tax cuts expire next year, but that only individuals making more than $400,000 would see a tax hike. He also called for the minimum corporate tax rate to be hiked from 21 percent to 28 percent and for a 25 percent tax on individuals with more than $100 million in assets.Â
Would that plan make a difference?Â
It would shrink the deficit by nearly $3 trillion over the next decade, according to the White House. But many of Biden's proposals would struggle to pass even a Democratic-controlled Congress; with Republicans in control of the House, they're going nowhere. Should Trump return to the White House, he has vowed to extend his 2017 tax cuts — which the CBO says would add nearly $4 trillion to the deficit over the next decade — and to push for more cuts. Both candidates oppose making cuts to the big sources of federal spending: Social Security, Medicare, and defense. "Neither party is remotely serious about either spending cuts or tax increases," said Brian Riedl, of the conservative Manhattan Institute.Â
What happens if Congress does nothing?Â
Under current policy and in the best-case scenario, the U.S. has 20 years to take corrective action before the federal debt reaches an unsustainable level, according to the University of Pennsylvania's Penn Wharton Budget Model. After that point, the analysts note, "no amount of future tax increases or spending cuts could avoid the government defaulting on its debt." Such a default would be disastrous for the U.S. and global economies. A reckoning could be delayed if interest rates fall back to recent lows, or if U.S. economic growth outpaces interest rates. But most experts agree that the country will eventually have to tackle its surging debt and deficits. The problem is that "nobody really knows what 'eventually' means," said Louise Sheiner, of the Brookings Institute. "The longer you wait, the more you are shifting costs onto the future generation."Â
Saving Social SecurityÂ
A demographic time bomb could blow a hole in Social Security. The program taxes current workers to support older Americans. But as the population gets grayer and lives longer, the worker-to-retiree ratio is dipping lower and lower. As a result, Social Security's trust fund is projected to run dry by 2035, triggering an immediate 17 percent cut in benefits. A number of proposals have been floated to stave off insolvency, including raising the age at which full benefits can be claimed from 67 to 70; hiking payroll taxes; and raising the limit on annual earnings subject to Social Security taxes, now about $168,600. Yet despite nearly a decade of warnings about the program's financial health, Congress has yet to approve any meaningful reform. "Nobody's acting as if that's something they've got to take seriously," said Andrew Biggs, senior fellow at the American Enterprise Institute. "So, I'll just be honest and say I'm worried about how this thing plays out."