Can we prevent a debt-driven economic collapse without reforming entitlements?

By James D. Agresti and Dustin Siggins
June 15, 2012
Revised 11/8/12

If the U.S. government continues with its current tax and spending policies, children born this year will be saddled with a crippling publicly held debt that is more than twice the size of Japan’s by the time they turn 30 years old. This grim picture, projected by the Congressional Budget Office (CBO) in its newly published annual long-term budget outlook, expects U.S. publicly held debt to grow from 73% of GDP by the end of 2012 to 247% of GDP by 2042.

Worse still, the CBO projects that current policies will continue to drive the U.S. deeper into debt, and by the time today’s newborns reach 38 years of age in 2050, the major federal healthcare programs and Social Security will consume all federal revenues, leaving nothing for any other function of federal government or even interest payments on the national debt.

Despite this ominous forecast, prominent economist and former Obama advisor Jared Bernstein is declaring that we don’t need to reform Medicare, Medicaid, Social Security, or “government’s other critical functions” in order to prevent an “explosive” debt that “swamps the economy.” Bernstein says “it is well within our means” to reduce the national debt by following the “broad outlines” of current law, “meaning all the Bush tax cuts expire, for example.”

When the CBO makes long-term budget projections, it typically projects two scenarios informally called “current law” and “current policy.” Current policy is what the federal government is actually doing, whereas current law is what is on the books. These are dramatically different because Congresses and Presidents have enacted tax and spending laws that don’t account for inflation or wage growth, expire in the future, or become effective in the future. Bernstein suggests that we stick with the current law to solve the looming debt catastrophe.

While Bernstein concedes that some elements of current law may be “unrealistic” in the short-term, he insists “there’s no reason” we can’t follow this plan for the long-term and those who ignore this approach “are doing so not for substantive, but for ideological reasons.”

Bernstein describes his proposal for taming the debt by saying that the “Bush tax cuts would all have to eventually sunset, and we’d need to continue – and ramp up – what looks like early progress on slowing the growth of health care spending.” Although this description is based upon CBO’s projections, Bernstein misrepresents these projections by whitewashing the details of the path he advocates. In truth, it would involve far more expense and sacrifice than he reveals.

Under current law, the good news is that publicly held debt drops from 73% of GDP today to 0% by 2069. This is a vast improvement over just last year when the CBO projected that the publicly held debt would be 75% of GDP in 2069 (this is partly due to the changes in law, but most of the improvement is attributable to CBO’s altered assumptions about future economic and demographic circumstances). The bad news, however, is that the following will also occur:

• federal taxes will perpetually consume a greater share of the U.S. economy, rising to 21% higher than the average of the past 40 years by 2025, 40% higher by 2045, 57% higher by 2065, and 66% higher by 2085. The CBO explains that this incessant tax growth occurs because “most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation.” As an example, the typical married couple with two children earning the median income of $96,200 will see their income and payroll taxes steadily rise from 13% of their income today to 24% over the next 25 years—an 85% increase.

• Medicare payments for physician services will be cut by 27% starting in 2013, bringing Medicare payment rates down to Medicaid levels. These payment rates have caused substantial problems for patients trying to get access to doctors. These Medicare cuts will increase in subsequent years and then be deepened by Medicare cuts in the Affordable Care Act.

• spending on all federal programs but Social Security and the major healthcare programs will decrease from 12.1% of GDP in 2012 to 7.9% of GDP over the next 25 years—a 35% reduction. This includes programs such as national defense, food stamps, other nutrition programs, unemployment, veterans’ benefits, federal employee retirement benefits, transportation, and education.

The specifics above paint a much fuller and far different picture than Bernstein’s sanitized description of the path he would have us take. It also bears nothing that this is an optimistic scenario because it does not account for the prospect of future severe recessions or major wars, which the CBO acknowledges “will probably” occur and “will probably cause significant and persistent worsening of the budget outlook relative to the projections contained in this report.” These projections also “omit the impact” that higher taxes “would have on people’s incentives to work and save,” and as the CBO explains, these higher tax rates will discourage “many taxpayers” from working and saving.

Like Bernstein, Ezra Klein of the Washington Post has also supported this plan and grossly understated its downsides, calling it the “do nothing” plan. Media Matters for America recently did the same while incorporating significant factual errors into its analysis.

Could we tame the debt in the way Bernstein and Co. claim? Yes, but if Congress and the President do nothing, drastically higher taxes and deep cuts to wide-ranging government programs are also a part of the scenario. Rather than ignore this reality, those who support the “do nothing” plan should candidly argue their case instead of masking how this proposal would impact the nation.

The data cited above is available in this spreadsheet.  This article is also posted at Hot Air, which is the primary publisher.

James D. Agresti is the president of Just Facts, a nonprofit institute dedicated to researching and publishing verifiable facts about public policy. Dustin Siggins is a policy/politics blogger and the co-author of a forthcoming book on the national debt with William Beach of the Heritage Foundation.

NOTE (11/8/2012): An earlier version of this article incorrectly stated that “the typical married couple with two children earning the median income of $96,200 will see their income and payroll taxes steadily rise from 13% of their income today to 24% over the next 25 years—an 85% increase.” Today’s rate is actually 14% (not 13%), which equates to a 71% increase.

4 thoughts on “Can we prevent a debt-driven economic collapse without reforming entitlements?

  1. We’ve just complete a study on turnaround the Social Security Trust with the following results:
    This report lays out a plan to save both the Social Security and Medicare programs, while producing the following results in the first ten years over of operations:
    • $2.7 trillion+ of ‘debt held by the public’ in the Federal Budget goes away,
    • A Rainy Day Reserves account of 5% per year, is established in year one,
    • By year ten, after ‘cost of living’ and ‘inflation’ adjustments:
    o Social Security and Medicare tax rates each cut by 8%,
    o Medicare Part B premiums paid by members, cut by 8%,
    o Social Security monthly payouts to qualified participates increased by 14%,
    o Provider fees increased by 21%,
    o Additional Medicare services offered – Dental, Hearing Aids, Optometry, etc, at no cost to members,
    o Investment Fund account of over $300B plus,
    o Earned interest on both the Investment Fund and Rainy Day Reserves accounts totaling just under $115B, and
    o Business process improvement savings of $5B plus,

    A detail report is available.

  2. Pingback: NYT Peddles Nine Separate Myths Touting Obama Sequester Ideas – NewsBusters (blog) : INVEST WEB

  3. Where does the pay for retired military fall? Shouldn’t it be separated from benefits to owed? The retired military earned their retired pay through service.
    Sam Hubbard

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