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Facing Reality on Entitlements

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Facing Reality on Entitlements

A Congressional Budget Office report leaves no doubt about the cause of the nation’s crushing debt burden. Summer 2022
Economy, finance, and budgets

A new Congressional Budget Office report confirms that Washington’s financial prospects are dire. Even while making generous assumptions about inflation and interest rates, these government economists and statisticians anticipate that federal spending will continue to outpace revenues well into the twenty-first century, creating historically large annual deficits and adding to the nation’s accumulation of public debt. By 2032, they forecast, outstanding government debt will stand at 110 percent of the nation’s gross domestic product (GDP), and by 2052, that figure will reach 185 percent—an astronomical share that exceeds that accumulated during World War II.

Past decisions have made this forecast all but inevitable. More than anything, the growth of entitlements—Social Security, Medicare, and Medicaid—has caused spending to exceed revenues, creating outsize deficits and a mounting debt burden. Though CBO forecasters did their best to work moderation into this inexorable trend, they could not erase the effect on their projections. Their numbers make clear that Washington won’t get a handle on its deteriorating finances until it gains some control over entitlement spending and financing.

Assuming that tax law remains largely unchanged, these economists project that federal revenues from all sources will grow roughly in tandem with the economy, with the government taking in an average of about 18 percent of GDP annually. The bulk of the projected deficit emerges on the spending side. The CBO projects that federal outlays will expand from 23.8 percent of the economy this year to 25.8 percent by the mid-2030s, and then climb to 28.9 percent by mid-century.

Entitlement spending is to blame for most of this increase. Social Security, health care, and other transfers from Washington swell in these projections from 10.8 percent of GDP this year to 13.7 percent in the mid-2030s and to 14.9 percent by 2052, amounting to more than four-fifths the relative boost in all spending. The rest comes from the need for Washington to pay interest on an enlarged debt load, itself the result of past increases in entitlement spending.

The CBO’s forecast tells a familiar story. Federal spending for decades has grown as a portion of the economy. In 1970, for instance, overall federal spending equaled some 18.7 percent of the country’s GDP. The rise from this level to the CBO’s 23.8 percent estimate for 2022 occurred even as defense expenditures have fallen from 7.8 percent of GDP in 1970 to just 3.5 percent today. It was the relative rise in entitlement spending from some 7.6 percent of GDP in 1970 to today’s level that all but erased the budgetary relief from the relative decline in defense spending.

With this history in mind, the CBO may have taken too optimistic a tack in its calculations. For instance, it assumes that defense spending will hold steady at about 3.5 percent of GDP—but mounting geopolitical pressures seem likely to drive some expansion in defense outlays. On entitlements, too, forecasters show signs of optimism, predicting that spending will go up at something close to the historical pace—yet several considerations suggest that it may accelerate. For example, the government has decided to continue subsidies under the Affordable Care Act, even though they were set to expire. These will accumulate over time. As of late June, President Biden was considering forgiving student debt, or at least a portion of it. This would constitute a new entitlement. Exact amounts would, of course, depend on how much the government decides to forgive and what income tests it places on recipients, but the government’s posture suggests an increase in the relative entitlement burden on the economy—and also sets a precedent for future generations of indebted collegians.

More significant than student-debt relief is the likely impact of aging on the country’s population. As the huge baby-boom generation retires, the number of dependent retirees will continue to mount. In 1970, some 10 percent of the population was aged 65 or older; by 2019, that number was 16 percent; and by the mid-2030s, according to Census Bureau estimates, it will be 21 percent. Such a large proportion of older people will increase demands for Social Security and Medicare entitlements and other federal services. Of course, CBO estimates try to take this trend into account, but perhaps not sufficiently. They consider the draw on Social Security, for instance, but not the burden on Medicare from the growing number of recipients over age 75.

None of this is to say that entitlements, already at some two-thirds or more of the federal budget, represent the wrong way for Washington to spend money. These programs reflect popular priorities, ratified by Congresses of both parties and signed into law by Democratic and Republican presidents alike. How the nation should allocate its output of goods and services is ultimately a political judgment.

Economics can only point out that those decisions will condemn federal finances to deficits and ever-increasing debt burdens until Washington takes one of three admittedly tough steps: reining in the growth of entitlement spending; sacrificing other government services; or telling voters that they must pay more in taxes. As the CBO has made clear, these are the only real ways to avoid an unprecedented debt burden.

Perhaps the economy will eke out faster real economic growth than the CBO’s assumption of slightly more than 1.5 percent a year, which would relieve some financial strain. Or perhaps inflation will persist longer than the CBO’s expectation that all will be well by 2023, which would benefit debtors, including the government, even if it hurts American households. But even if events reduce the intensity of the government’s financial problem, the budget basics would remain the same. Washington must address the impact of entitlements realistically—and the clock is ticking.

Photo: akinbostanci/iStock

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