Our national debt recently exceeded $35 trillion and is expected soar over the coming years. This amount only includes debt held by the public, and excludes large liabilities such as Social Security and Medicare obligations and unfunded government pensions.Â
The government spends more than it takes in and the resulting deficits cannot be eliminated solely by spending cuts. The government must also find ways to increase revenue. If the situation is not brought under control, America’s long-term economic prospects are bleak. The longer it takes to slow down the growth of national debt, the worse it will be for America down the road.
Unfortunately, doing what is needed will cause significant short-term pain for many Americans, which is politically unpopular. In 2025, both spending programs and tax cuts expire. Extending them will increase deficits, causing the national debt to balloon.
For example, consider the provisions of the 2017 Tax Cuts & Jobs Act that expire at the end of 2025. While corporate tax rate cuts were made permanent, individual tax provisions expire on Dec. 31, 2025 and on Jan. 1, 2026, tax law reverts to the provisions that were in effect in 2017.
Both political parties want to extend the portion of those tax cuts that reduces taxes for their base. But it is unclear how those cuts will be funded.
Furthermore, on Jan. 1, 2026, health insurance premium subsidies under the Affordable Care Act for low- to moderate-income individuals expire. Millions of Americans rely on these subsidies to purchase health insurance coverage. Elimination of those subsidies would make health insurance unaffordable for those households.
By 2031, a mere seven years from now, Medicare Part A (which pays for hospital costs) will start running out of funds. It is estimated that there will only be sufficient funds to pay 87% of Part A payments to hospitals.
Two years later, in 2033 (a mere nine years away) similar problems will confront Social Security. Social Security benefits, in the aggregate, face an anticipated 23% reduction. Perhaps the payment of benefits will be means-tested — in other words, Social Security benefits will be phased out for households over a certain income threshold.
Alternatively, Medicare Part A and Social Security funding could be increased to address the expected shortfalls. Under our current system, if Medicare and Social Security taxes are increased, then millennials and Generation Z will have to pay more to fund Baby Boomers’ medical costs.
Another large demographic issue is that millions of Baby Boomers have not adequately saved for retirement and their retirement funds will be depleted before they die. Who is going to pay for their housing? Housing for elderly people with no means to pay for assisted living is typically paid for by Medicaid. How will increased Medicaid costs be funded?
By historical standards, the past 80 years have been an exceptional period of peace and prosperity. The global trends toward nationalism, replacing democracies with autocracies and regional conflicts all increase the likelihood of a major geopolitical crisis, which would undoubtedly result in a substantial increase in government spending.
Over the past seven years, excluding pandemic-related spending, we have added about $7 trillion to the national debt. This was in periods when we generally had a strong economy. If the economy weakens and we move into a recession, increased government spending and the commensurate deficit increases will result in an acceleration of our national debt.
Over most of the past 15 years, the U.S. Federal Reserve Board and other nations’ central banks have kept interest rates artificially low.
Because these low rates are inflationary, they are unsustainable on a long-term basis. In the early years of this policy there was relatively low inflation because production of many goods was offshored to low-cost jurisdictions such as China.
The economics of offshoring have changed such that offshoring is no longer an inflation hedge — particularly if tariffs become the norm.
In recent years, interest rates have returned to normalcy. The current Fed Funds Overnight Interest Rate of 4.45% is almost equal to the average rate of 4.42% for the period 1972-2022. As interest rates increase, government financing costs will increase commensurately. Many economists project that interest on the national debt will soon exceed defense spending.
In order to prevent becoming like Argentina, Congress and the White House must work together to impose some meaningful combination of tax increases and spending cuts. Unfortunately, because doing so is a losing political message, politicians are reluctant to take necessary actions.
Jim de Bree is a Valencia resident.
