There was a prolonged moment of cacophony during this month’s State of the Union speech, when U.S. President Joe Biden accused “some Republicans” of wanting to cut health and retirement benefits for American seniors. GOP members of Congress howled in protest. Mr. Biden challenged them to pledge never to touch these entitlements.
“So tonight, let’s all agree to stand up for seniors. Stand up and show them we will not cut Social Security. We will not cut Medicare,” the President said. “If anyone tries to cut Social Security, I will stop them. And if anyone tries to cut Medicare, I will stop them.”
Without decisive action, however, the fate of Social Security (which provides retirement and disability pensions) and Medicare (which covers hospital and doctor fees for U.S. seniors) may soon be out of Mr. Biden’s hands. Spending on these two programs alone will account for 37 per cent of federal expenditures this year, or about US$2.4-trillion. Tack on Medicaid (health insurance for low-income Americans) and Obamacare subsidies, and the total tab amounts to almost 50 per cent of the US$6.2-trillion federal budget.
Without changes, total spending on Social Security and Medicare is projected to almost double within a decade. For years, almost everyone in Washington has acknowledged that something must be done to “fix” these programs before their costs grow so large as to crowd out spending on everything else the U.S. government does, including defence. Kicking the can down the road is a long-standing tradition in Washington that is usually only broken in times of crisis. But that moment may be coming.
Congressional budget officer Phillip Swagel steered clear of the word “crisis” this week in tabling 10-year projections for federal spending. But his report nevertheless landed like a grenade in Washington as the White House goes to battle with Republicans over raising the federal debt limit beyond its current US$31.4-trillion cap. Without legislation to raise the cap, Mr. Swagel warned the U.S. Treasury could default on its debt as early as July.
“Over the long term, our projections suggest that changes in fiscal policy must be made to address the rising costs of interest and mitigate other adverse consequences of high and rising debt,” he wrote in a letter prefacing his report.
Gross federal debt is now projected to increase by more than US$19-trillion, or more than 60 per cent, to about US$52-trillion by 2033. That is US$3-trillion more than Mr. Swagel last year projected it would grow over the same period. Rising interest costs and additional spending approved by Congress have inflated the projected borrowing.
At US$46.5-trillion, federal debt held by the public is on track to reach 118 per cent of gross domestic product, compared to 98 per cent of GDP this year. The difference between gross debt and debt by the public is largely equal to the amount of money that the government has borrowed in the past from the Medicare and Social Security trust funds. Those funds are on track to be depleted within a decade, leaving both programs with huge deficits that will require more borrowing, premium increases or benefit cuts.
There is no guarantee that financial markets will allow Washington to keep borrowing willy-nilly. Markets largely turned a blind eye to Washington’s growing structural deficits in the decade after the Great Recession and welcomed its extraordinary spending during the pandemic. But with US$8-trillion added to the federal debt in the last three years alone, and with debt-servicing costs surging on the heels of successive interest-rate hikes, the jig may be soon up for Washington.
In the five decades prior to 2022, a period that includes the Great Recession and the pandemic, average annual U.S. budget deficits totalled 3.6 per cent of GDP. The shortfall this year is projected to amount to 5.3 per cent of GDP. It is slated to expand to 6.9 per cent of GDP, and that is only if no major recession or global pandemic occurs.
“The warning is that the fiscal trajectory is unsustainable,” Mr. Swagel said on Wednesday.
Fixing the problem need not entail cutting Medicare and Social Security benefits if Congress and the White House can find a compromise on payroll-tax increases and raising the retirement age. Mr. Biden wants to eliminate the cap on Social Security taxes for wealthy Americans. Some Republicans propose progressively increasing the retirement age to 70 from the current threshold of 67.
But who’s kidding whom? This is Washington, after all. The most likely outcome is that nothing will be done until the last possible moment. And by then, benefit cuts will almost certainly become unavoidable.