After last month’s column explaining that the debt our nation is amassing today will be paid by our children and their children, a reader wrote asking what that means in actual terms. How will it affect daily lives, she asked?
“Depending on what far-sighted, compassionate people are running our government, it looks like their options are: cut social security; cut Medicare; cut the military; cut government pensions; continue to cut all those smaller low-lying fruit like education, foreign affairs, justice and infrastructure; or grant jubilee status to the national debt,” she observed. (I especially like her last, tongue-in-cheek suggestion.)
Her options are, indeed, among those that must be considered to bend our spending path closer to our revenue stream — a gap which is large and growing wider every year.
But there’s one more option in the equation: raise revenues.
Consider your own household. If your expenses consistently exceed your income, you have several choices. First, you can borrow money to cover the gap. That’s what our nation is doing today.
If you’re lucky, you can find a second bank and maybe even a third to continue lending to you if the first one refuses as your debts continue to mount. But at some point, lenders are likely to become nervous about giving you any more loans — or, if they do, those loans will likely come with very high interest rates to reflect the higher risk you pose for non-repayment.
And so it is with America as a nation. We’re fortunate to be a country seen as a haven for investors (who are, in essence, lenders) in good times and bad. Our currency is the world’s most widely used; it’s easy to move money into and out of the country; and our nation, so far, has enjoyed a reputation as a responsible manager of our finances.
But as good fiscal managers, we should never let the national debt get so high that we run the risk of defaulting, as Greece, Argentina, and some other countries have done in recent years; or of otherwise scaring away investors.
Today, our debt is projected to equal the value of all goods and services our nation produces within just ten years, the highest level since World War II. A debt of that level begins to send yellow flashing lights to investors, who may grow reluctant to put their money at risk by lending us any more money at reasonably low interest rates.
So that leaves us with two other choices, just like households who overspend. One is to cut our spending; the other is to increase our income, or revenue.
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In a household, a person might take a second job to cover the family’s spending. If they’re already working as much as humanly possible, they’ll have to take a hard look at their family’s spending and make some tough choices.
If our generation refuses to make these hard choices, those choices will be forced upon our children and their government leaders.
On the spending side, we should logically look at the biggest ticket items. Social Security, Medicare, and, more recently, Medicaid top the list, along with defense and interest on our national debt.
Let’s be clear: seniors are the biggest beneficiaries of government social spending. Why? Seniors vote; our children don’t. Plus, there are lots of baby boomer retirees today.
Our Social Security trust fund is projected to run out of money by 2035. If it does, benefits would be reduced to match the revenue collected annually through payroll taxes — a cut of about 20%.
But Congress surely will fix the problem before then. That means our children likely will face higher payroll taxes; a higher retirement age; and lower benefits. The same “fix” is likely for Medicare, which now spends more than dedicated taxes bring in.
Congress also will continue to look for additional cuts in such items as infrastructure (already at historically low levels), education, law enforcement, and even the military.
But given the large and growing gap between spending and revenue, spending cuts alone won’t restore our fiscal balance. With federal revenue at its lowest level in decades due to recent tax cuts, our children ultimately will have to pay higher income taxes (on top of higher payroll taxes).
So our children will face higher taxes, lower government investment, and lower Social Security and Medicare benefits after retirement. All this translates into a lower standard of living for our children and grandchildren.
The longer we wait, the bigger their burden will be.