Entitlement Spending and the National Debt

 

I discuss two fundamental economic and fiscal problems on this website:

  • The slow growth of our economy, only 2.1% per year since the end of the Great Recession in June 2009. This is largely responsible for stagnant wages for middle- and low-income workers, which is in turn responsible for the rise of the populist presidential candidates Bernie Sanders and Donald Trump.
  • Our massive national debt, now 74% of GDP for the so-called public part, on which we pay interest. This is the highest it has been since right after WWII.
    Capture2

Slow economic growth gets more public attention because of its direct and negative effect on so many people. However massive debt is more of an existential problem.  Right now our debt is almost “free” money because interest rates are so low.  But with debt predicted (by the Congressional Budget Office, for example) to keep climbing steadily under current policy (see the first chart) and with the inevitability of increased interest rates in the future, interest payments on the public debt are bound to rise precipitously.
Capture4The second chart just above (from the Concord Coalition) shows that interest payments on the debt will likely soon become the leading source of growth in federal spending.  But perhaps surprising is that the three non-interest sources of spending growth are the entitlement programs, Medicare, Social Security and the combined Medicaid, CHIP and ACA exchange subsidies.  All other government spending will decrease in relative terms.
Capture3Is it not readily apparent from this data that the only way to curtail a huge fiscal crisis in the not so distant future is to get entitlement spending under much better control?  The last chart, just above, (from the Trustees of SS and Medicare) shows the growth in general fund revenue required for Medicare and SS going forward.  In 2016 the discrepancy is 2.1% of GDP which amounts to $401 billion.  The discrepancy will double by 2040.  Of course, OASDI (SS) and HI (Medicare Part A) have trust funds paid into by payroll taxes.  But these trust funds are already paying out more than they take in and will be exhausted in a few years.

Conclusion. Spending on entitlement programs must be brought under much better control. How to do this will be the topic of my next post.

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10 thoughts on “Entitlement Spending and the National Debt

  1. Jack,
    To add a bit of urgency, the Medicare financial requirements will be further augmented by the post
    WWII baby boomers becoming Medicare eligible. I recall that they double between 2000 and 2030. Am I close?
    Paul

    • Medicare is the single biggest reason why entitlement costs are increasing so fast. Demographics, i.e. the rapid increase of retiring baby boomers certainly has a lot to do with this.

  2. I don’t see the problem here as long as the 25% working and paying taxes continue to work and pay taxes for the 75% who are collecting entitlements (and SS is not an entitlement since it is a payment of what I have trusted the government with for 50 years).

    • The fact that there are fewer and fewer working people per retiree is the reason the SS trust fund is going broke so fast. Also people are living longer all the time and on average getting much more back than they have put into SS over their working lives.

  3. Jack,
    I will be curious to learn your suggestions. There is no question that entitlement programs are out of control. I hope that you also address the high cost of health care whether it be the government paying, the insurance companies or the individual person after or before those entitlements. In short medical personnel make too much money in relation to the less fortunate who probably require the most health care.

    I would add that the top 10% also have to keep paying after they reach a certain point and are exempt. I could go on, but I am sure you need this subject matter far better than I.

    Doug

    • I will absolutely be addressing the high cost of all healthcare, public and private. I agree with you that medical personnel are very well paid. I think that the best way to control these costs is with a more consumer oriented, free market healthcare system.

  4. I would agree if we have a safety net for those incapable of meeting the premiums. Still, I think you assume too much for the “consumer oriented, free market healthcare system. My basic motto with capitalism is “caveat emptor” or Let the buyer beware. However, plans are so complicated that it remains a gamble in what can be ignored or not in any plan. Isn’t there something wrong when general healthcare requires a profit system?

    Doug

    • General health care doesn’t absolutely require a free-market system. We could do it socialistically (single payer) like so many other countries. A well designed free-market system would also control costs and be so much better in other ways (e.g. with respect to innovation).

  5. Yes, I totally agree that innovation must be built into any system. However, I don’t believe humans innovate only because of the profit motive. Surely in education we often are not driven by profit. I can’t imagine that any of us who volunteered at Wakonda had any interest in profit for that effort. I believe people in the medical profession will innovate because of the desire to reduce, if not eliminated pain and suffering. Altruism is as human as are the desires for wealth. Maybe I should have been a preacher.

    Seriously, I do appreciate your website.

    Doug

    • We’ll have a lot more innovation if there is a financial reward for doing it. We do see lots of innovation in education policy and practices. But this is largely because education is highly decentralized and locally (and state) controlled to a large extent. States are highly competitive with respect to educational practice. This means that the better performers serve as models for the poorer performers.

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