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See who will pay to fix the country’s growing debt
America’s most unsolved gigantic problem is the $35 trillion national debt. It’s rapidly growing to unsustainable levels, and Americans will eventually face some unfortunate choices.
Neither of this year’s presidential candidates — Democrat incumbent Joe Biden and Republican challenger Donald Trump — is being honest with voters about the sacrifices that lie ahead. Biden wants increase taxes on corporations and the wealthy without touching the benefits of budget-busting retirement programs, Social Security and Medicare. Trump pretends that some new tariffs on imports and further tax cuts on supply will magically solve the problem.
Virtually no politicians tell the truth about how to fix the debt because the real answer is that there’s something for everyone to hate. Tax increases, spending cuts, and benefit reductions are all inevitable, and this message upsets so many voters that telling the truth and getting elected are mutually exclusive.
However, there are solutions. In one new analysis for the Manhattan InstituteBudget expert Brian Riedl outlines a series of actions Congress can take to stabilize federal borrowing and avoid a debt crisis that would trigger high interest rates, runaway inflation, or both. The United States doesn’t have to pay off its entire national debt. It just needs to cap it at about 100 percent of GDP and keep it there. And the actions Riedl outlines aren’t the draconian ones that will be needed if Washington drags its feet, as usual, and waits until the last minute to address the problem.
There are some truths to the math of debt. One is that taxes on the rich will have to go up, because that’s where the money is. The share of national wealth controlled by the top 1 percent of earners has increased from 14% in 1990 to 16.8% in early 2024while the share for the bottom 50% has fallen slightly. Higher taxes on the wealthiest Americans would restore some of the balance lost over the past 30 years.
Another inevitability is that wealthier seniors will have to pay a little more and receive a little less, because they receive a disproportionate share of federal benefits. Many Medicare and Social Security beneficiaries mistakenly believe that they have accumulated contributions to which they are fully entitled when they retire, but that is not how these two programs work. Instead, both programs are largely funded by current workers who pay for enrollees according to benefit schedules that in some cases were set long ago, when life expectancy was shorter and retirement life very different.
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Current Medicare and Social Security enrollees should not complain because most are receiving more than they deposited. The average retiree today will have paid about $176,000 in Social Security taxes and will receive about $238,000 in benefitsadjusted for inflation. For Medicare, lifetime taxes are about $48,000, while benefits will total $298,000also adjusted for inflation.
Part of the reason the federal budget outlook is so bleak is that the total cost of Medicare and Social Security is exploding as baby boomers flood the programs, and there aren’t enough workers coming in to pay all the benefits due on the current schedule. The ratio of workers to retirement beneficiaries has fallen from 5.1 in 1960 to about 2.9, and is expected to reach 2.5 by 2030. Fewer workers are funding benefits for more retirees, and both programs are expected to run out of money in the early 2030s.
One way to keep benefits in full might be to simply raise the payroll taxes that fund Social Security and Medicare, or to raise the Social Security tax cap, which applies only to the first $168,600 of income. But at some point, that distorts the entire purpose of these two programs, which were designed to keep seniors out of poverty — not to boost seniors’ lifestyles at the expense of younger Americans still trying to build families and careers.
Social Security and Medicare have largely operated by providing stipends and last-resort health coverage to vulnerable seniors. At the same time, today’s retirees have become the wealthiest demographic group in American history, thanks to the booming economy of the 1980s and 1990s, an 11-fold increase in stock values over the past 30 years, and a three-fold increase in home values. Many retirees own their homes or have small mortgage payments, ample savings, and no child-care burden.
Not all seniors are wealthy, of course, but as a whole, older Americans control more wealth than any other group. The median net worth of people between the ages of 65 and 74 is $1.8 million, the highest of any age group. according to the Federal Reserve. The second highest is for those 75 and older, with a median net worth of $1.6 million. The Wall Street Journal recently reported on the rapid growth of retirement towns in the South where baby boomers party “like they’re in college, except they don’t have to go to class and they have $3 million in the bank.”
Will lawmakers have the stomach to tackle the nation’s debt? The grounds of the U.S. Capitol. (TB/RC/CLH) (REUTERS / Reuters)
Social Security and Medicare are the nation’s most expensive social programs, but the benefits flow to America’s wealthiest demographic. Raising taxes to maintain those benefits at current levels would amount to “the largest intergenerational wealth transfer in world history,” Riedl wrote in the Manhattan Institute analysis.
His set of solutions involves reasonable sacrifices for those who are able to give, as the chart above illustrates. Riedl would keep Social Security and Medicare benefits fully intact for the bottom 40 percent of enrollees, by income. But he would enact modest benefit cuts for the top 60 percent, while gradually raising the Social Security retirement age from 67 to 69.
There would also be targeted tax increases on corporations and the wealthy, to include raising the top individual income tax rate, increasing inheritance taxes on capital gains and reducing some corporate tax breaks. Defense spending and other so-called discretionary spending that Congress must approve each year would have to be limited or reduced.
At least two changes would directly affect ordinary workers. One would be a 1-point increase in the tax that funds Medicare, with workers and employers each paying half. Another would be to tax part of employer-provided health benefits as income, which would be a de facto tax increase.
Most working taxpayers can find something in this draft proposal that would make them worse off. In a way, that’s the point: The nation’s massive debt burden can’t be fixed while exempting any large constituency.
But it’s also worth noting what’s not in Reidl’s plan. There’s no value-added tax, which would be a kind of national sales tax that would bring in tons of new revenue paid by consumers — similar to what most wealthy nations have. There’s no big corporate tax hike that could make the United States less competitive with low-tax jurisdictions and spawn new tax shelter schemes. There’s no increase in the Social Security tax. And there’s no call to cut Medicaid or destroy the social safety net that mostly benefits the poor.
Liberals may prefer to solve the problem with more tax increases and deeper cuts in defense spending, while leaving most social benefits intact. There are many options. The Congressional Budget Office regularly lists ways to approach workincluding higher taxes on corporations and the wealthy and big cuts in spending on defense, roads, airports, law enforcement, national parks and everything else the government does.
But everything comes with trade-offs, and unintended consequences could make the problem worse rather than better. If tax increases are too high, they will kill growth at a time when budgetary constraints leave less room for error than in the past. Defense cuts could backfire in a world with hot wars in Eastern Europe and the Middle East and a new axis of chaos involving Russia, Iran, North Korea and possibly China.
So far, every party plan to tackle the national debt has failed because it is politically popular with one major faction but politically toxic to another. When politicians start producing plans that no one likes, they may finally be getting somewhere.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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