Three things from our pod this week with economist Brian Riedl:
The problem is not the negotiation over the debt limit. That’s a distraction.
The problem is that America is spending more on Social Security and Medicare than it brings in. And in a few short years, no one will lend Uncle Sam enough money to cover the costs.
It ends with benefits, higher taxes for the middle class, and a value-added tax like Europe.
The podcast was conceived this week as a conversation about the non-negotiation-negotiations going on between the GOP House and White House over raising the debt limit. D-day, or x date if you prefer, will be around June 1. Or maybe a little later. But we quickly dispensed with that topic because, guess what? The House is going to raise the debt limit. The White House is going to accept some spending cuts. Will any of it make a dent in America’s $31.5 or so TRILLION debt? Nope.
It won’t be news to you that our politicians on both the Left and the Right are entirely unserious about America’s fiscal problems. But it might be news to you that Uncle Sam’s ability to borrow is predicated upon the strength of the dollar as the world’s reserve currency. But for how long will that continue? Right now the debt is about 100 percent of our GDP. Within a couple of decades, it’ll be 200 percent of GDP. Where is that money going to come from? Who, asks our guest, is going to bail us out then? We’re not Greece. We’re not Iceland. We’re the largest economy in the world. And there’s no one.
Bond markets may force the United States into a reckoning, but it’s well beyond time for our government to recognize that Social Security and Medicare are unsustainable. And no, all of Jeff Bezos’ and Elon Musk's and Warren Buffett’s money ain’t gonna fill the hole. Taxing billionaires at 100 percent won’t do it. Your money will. And not just your money, but your time. You’ll work longer to pay your taxes. You’ll pay more at the store, just like our friends in Paris and London, who cough up an extra 20 odd percent in value-added tax. And you’ll get less — less medical care, less social security. These are facts. This is inevitable.
If you were running your household like this, you’d be out on the street. Paul Ryan told you that, and apparently Paul Ryan is, per Donald Trump, a loser. Now the Democratic Party and the Republican Party are telling you they’re not going to touch your benefits. Guess what? They’re lying. They have to. So ask yourself, should we fix this on our debtors’ terms, in the midst of a crisis? Or should we do something sooner? Yeah, the answer is pretty obvious.
HIGHLIGHTS
How did we get here?
BR: We got here because politicians won't make difficult decisions, they pander and pander and pander. And they put spending programs in the permanent baseline to grow forever every year without a vote. Right now, the debt is about a hundred percent of the size of the GDP, we're going to be heading to 200% of GDP over the next couple decades. And that assumes peace, prosperity, and low interest rates. If interest rates rise, we could have a debt heading to 250 or 300% of GDP. And these are basically fantasyland numbers. The economy would crash long before we even get to these points.
We’re on a list with Greece and Libya and Sudan in terms of debt-to-GDP ratio…
BR: The advantage we have with other countries is, we're the world's reserve currency and people, at least for now, want to lend us money, which will last for a little while. The disadvantage we have relative to other countries is that our economy is so big that if we have a debt crisis, who is going to bail us out? Greece can have a debt of 200% of GDP and it's still, their economy is small enough that the rest of the world can bail out Greece, the rest of the world can bail out Portugal. If America hits 200 or 250% of GDP, there is no one coming to bail us out.
Why doesn’t anyone care about America’s massive borrowing?
BR: There was a big anti-deficit push in the eighties and nineties, and we even balanced the budget in the late nineties. But once we hit a deficit in early 2000s, our politics broke on fiscal policy. Republicans wanted tax cuts, Democrats wanted new spending, nobody seemed to worry much about deficits.
And then we even had the short-lived Tea Party era that seemed like it was rebelling against deficits, but really was just kind of rebelling against temporary stimulus and bailouts.
What’s driving the need to borrow so much?
BR: But if you want to know what's really driving the long-term red ink, so CBO, the Congressional Budget Office projects $114 trillion in deficits over the next 30 years. That's the rosy scenario, peace, prosperity and low interest rates, 114 trillion in borrowing. That entire amount reflects the shortfall on social security and Medicare, actually more. The social security and Medicare systems are going to run a shortfall of $116 trillion, and the rest of the budget is going to run a $2 trillion surplus over the next 30 years. So if we really want to look at it on a program by program level, we have 74 million retiring baby boomers retiring into a system that pays them dramatically more than they ever contributed to the system. And no one wants to reform it.
Are there no politicians in favor of fiscal reform?
BR: Republicans made some vague hints about social security and Medicare reform at the beginning of the year, President Biden slapped the Republicans down at the State of the Union, and now Republicans are racing to microphones to tell everybody how they are never going to touch social security and Medicare, any such accusation is false. You even have Donald Trump on the campaign trail saying, I'm the Republican who will never touch social security and Medicare, unlike Ron DeSantis and others.
It's remarkable. I mean, both parties are tripping over each other to pledge that they're going to let America, the federal government head towards insolvency.
The sad reality though for America is, you can criticize Paul Ryan all you want and people can spike the football and say, we defeated Social security and Medicare reform. We defeated Paul Ryan. But the problem hasn't gone away. The meteor is still heading towards the earth, you can acknowledge or deny it, the meteor's still on its way.
Where does this end?
BR: What's going to happen at some point is, there is really nobody out there who's going to lend us $114 trillion over 30 years. China and Japan only hold $2 trillion in our debt and they're selling it. The Federal Reserve only holds 5 trillion and they're trying to downshift. So that means we are counting on American banks and savers and mutual funds and investment companies to lend Washington a hundred trillion dollars over the next 30 years at low interest rates. That's not realistic, at least not at reasonable interest rates. So if we don't want to deal with this now, the bond market's going to fix it for us by cutting us off at some point.
Is the GOP doing the wrong thing forcing a debt limit negotiation?
BR: I do support a lot of what Republicans are doing now on the debt limit on the principle of first do no harm. I mean, discretionary spending caps are not going to fix the long-term budget, but they can at least help us stop digging and making it worse. So the first step, stop digging, half discretionary spending, do the low hanging fruit.
But from there we need to get both parties together to address social security and Medicare as soon as possible. And this means, for Republicans, you're going to have to put taxes on the table too. And that's for two reasons. First, I've run the numbers. It's really hard to close a $114 trillion 30-year deficit, or even half of it on just Social Security and Medicare savings. You would have to completely devastate Social Security and Medicare, and in ways that would be unrealistic.
So policy-wise, you can't get there entirely on spending cuts. […] And again, most of the savings are going to have to come from Social Security and Medicare, because that's what is driving the red ink. But even... We're going to have to put taxes on the table. And one other point on putting taxes on the table, the longer we wait, the more tax heavy the final solution is going to be. Because if we wait 10 or 15 years from now, when the baby boomers are all 85 years old, you're not going to be doing much to cut Social Security and Medicare when they're 85 years old. And you can't start the phase in spending reforms in the middle of a debt crisis. You're going to be more drastic and tax heavy the longer you wait. So I would rather take a bad deal now than a horrible deal in 15 years.
Can we get there with taxes?
BR: It's simple on math. You can't get... I mean, counter whatever the Democrats will tell you, taxing the rich doesn't come close. I've run the numbers. You could seize every dollar of billionaire wealth. You could tax the rich at 100%. It wouldn't come close. Middle class taxes are where most of the revenue actually is, and middle class taxes will probably end up going up modestly. Not enormously, but modestly. We might see a 1% of GDP increase, 1.5% of GDP increase, mostly from the middle class.
On Social Security and Medicare, the time to exempt all retirees, or everybody over the age of 50, was 15 years ago. This is why... The reason President Bush was pushing Social Security reform in 2005 is not because Social Security was going bankrupt in 2005, but because that was the last chance to say that everyone over 50 is going to be grandfathered out. Well, now it's too late to grandfather everybody out. Because right now, if you did that, you'd be grandfathering out the 74 million baby boomers who are driving the problem. It's too late.
Now on Social Security and Medicare, we're not going to cut anybody off. We can phase in reforms, and even you can set it up so that most people will still get about what they paid in. The problem right now is you have a lot of people getting a lot more than they paid in. And on Medicare, the typical retiree gets triple back what they paid in. What we have to do is start raising the eligibility age, means testing benefits at the top, trimming the formula, not cutting anybody off. But no, they're not going to get all they expected.
Should we raise the retirement age?
BR: Right now, the retirement age is gradually heading to 67. We could gradually raise it to 69, not immediately, but gradually, over a span of 10 to 15 years. That could wipe out about a third of the Social Security shortfall.
Social Security is actually easy to solve on a policy level. There's only three levers. The eligibility age, trim upper income benefits, or raise payroll taxes. It's just some combination of the three. I think eligibility age can get you about a third of the way there. I think you can get most of the rest of the way there by trimming upper income benefits. There might be a small tax change, but it'll be small on Social Security. That's the kind of thing, if politicians actually care, the two parties could solve Social Security in 15 minutes.
And Medicare?
BR: Medicare is brutal. Medicare's whole is two to three times as big as Social Security's deficit, and you have to fix the whole healthcare system really to get at Medicare. And I have reforms, and I have ideas, and others have reforms and ideas, but none of it is a silver bullet that totally fixes the problem. And that's one of the reasons we say that taxes will probably end up going up a little bit too. Because Social Security can be solved. Healthcare, we don't have a full solution, at least not to keep it at the current share of GDP without rising at all.
Whatever you do, the Medicare system takes in 1.4% of GDP per year. That's how much it collects in payroll taxes. It spends 3.5%, and it's heading to 6.5% over the next 30 years. It's going to go from 3.5 to 6.5, while still collecting just 1.4. So if you want to totally fix Medicare on the spending side, you have a long ways to go. You have to get a lot of efficiencies to go from a projected 6.5 anywhere close to a system that only collects 1.4. And that's why the best I can do is maybe get Medicare down in my reforms to about 4% of GDP, and that's pretty brutal. And even then, you're still running a 2.5% of GDP deficit.
And again, where does this end?
BR: Ultimately, I think this ends with us looking like Europe. I think we end up with about a 15% value-added tax and a payroll tax that's currently 15%, rising up closer to 20% or 22%. That's how Europe funds their huge spending. I think we just end up in 20 or 30 years with middle-class taxes looking a lot like Europe.
Full transcript here.
SHOWNOTES
Congressional Budget Outlook 2022
GOP Debt limit proposal (The Hill, April 20 2023)
Debt limit X-date could still crash Congress’ summer break (Politico, May 12 2023)
Top 12 countries with the highest Debt-to-GDP ratios (World Population Review, 2023)
Congress Must Address Washington’s Unsustainable Debt Path: Congressional Testimony, May 4 2023
America Is Ignoring Its Bulging Budget (National Review, March 7 2023)
Getting to Yes: A History of Why Budget Negotiations Succeed, and Why They Fail (Manhattan Institute, June 18 2019)
The GOP wonks trying to get their party not to detonate the debt limit bomb (Washington Post, April 17 2023)
The former Trump aide crafting the House GOP’s debt ceiling playbook (Washington Post, February 19 2023)
Echelon Insights poll
Congress Should Prepare for a Historic Showdown (National Review, January 12 2023)
In 2006, then-Senator Obama gave a floor speech defending his decision to vote against an increase in the debt ceiling under Bush
In 2011 and 2013, the GOP-led House fueded with Senate Dems/ President Obama and came close to defaulting. Investopedia recounts.
1995-96 Debt Ceiling Handling (The New Republic, August 2 2011)