• According to the latest CBO projections, $1 trillion-plus budget deficits have arrived and are here to stay due to the surging costs of Social Security and Medicare.
  • Costs to these programs are rising because America is in the middle of a projected 74 million Baby Boomer retirements from 2008 to 2030. 
  • In the current political climate, there is little likelihood of lawmakers acting to reform Social Security and Medicare before deficit spending balloons even further.

A new era of budget deficits

From a budgetary standpoint, the United States is entering a worrisome new era. National media outlets hardly gave the news a passing mention, but according to the latest projections from the Congressional Budget Office (CBO), $1 trillion-plus budget deficits have arrived — and are here to stay thanks to the surging costs of Social Security and Medicare.

Assuming a best-case scenario in which interest rates remain low, the U.S. avoids major conflicts, and the economy stays strong, the CBO projects that the budget deficit will grow to nearly $2 trillion by the end of the decade. If the interest rates of the 1990s return, that figure could plausibly balloon to $3 trillion as debt maintenance becomes more costly. 

According to Brian Riedl, a senior fellow at the free-market think tank the Manhattan Institute, this news should not be surprising to anyone who has been paying attention to federal spending patterns. Economists have been warning for decades that, absent reforms, the federal budget would eventually sink under the weight of Social Security and Medicare.

Unlike the $1.4 trillion deficit that Congress and President Barack Obama approved during the Great Recession, which gradually decreased as the economy recovered, the current deficit is taking place in a full-employment economy. This leaves the U.S. without an easy off-ramp. Just the opposite, in fact, because low interest rates are not a given and could easily rise to make the situation worse.

“A government’s debt cannot rise as a share of its economy indefinitely,” Riedl explained in a recent article for The Dispatch. “At a certain point, perhaps when the next recession grows the debt even faster, the bond market may determine that soaring U.S. debt is no longer a safe investment. The resulting sell-off could trigger a financial panic.”

How we got here

America is in the middle of a projected 74 million Baby Boomer retirements from 2008 to 2030. If someone retires at age 66 and lives until 90, a fairly common scenario, they will spend nearly a third of their life in retirement at the expense of taxpayers. Demographics are thus the primary driver of increasing Social Security and Medicare costs, and the rising cost of healthcare does not help matters.

According to the CBO’s projections, between 2019 and 2049 the Social Security system will collect $56 trillion in taxes and spend $75 trillion in benefits. The resulting $19 trillion shortfall will have to come out of general revenue. Medicare is even worse. Over that same period the CBO projects $17 trillion in taxes and revenues but $61 trillion in benefit spending, a $44 trillion shortfall. Much of this shortfall will have to be financed by borrowing. Add in interest costs to the debt, and Social Security and Medicare face a $103 trillion cash shortfall over the next three decades.

Meanwhile, the rest of the federal budget over the next 30 years will run a $23 trillion surplus. Simply making cuts to federal defense or discretionary spending will not be enough to boost this surplus and cover the shortfall driven by Social Security and Medicare. 

Riedl put it bluntly: “Washington does not have a general budget deficit problem; it has a Social Security and Medicare problem.”

The case for reforms

Not all economists agree that such large budget deficits are approaching a crisis point. Harvard economics professors Jason Furman and Lawrence Summers argue that low interest rates make the national debt more affordable. MIT economist Olivier Blanchard argues that rising deficits can be sustainable as long as the economic growth rate is greater the interest rate paid on government debt (r < g), because then the debt’s share of the economy will fall. And Matthew Yglesias of Vox suggests that new debt can offset whatever economic drag results from the borrowing by being used on pro-growth projects.

Riedl disagrees, arguing that the standard economic assumptions about government debt remain applicable to today’s situation. In no uncertain terms, he laid out the case for making spending reforms to Social Security and Medicare sooner rather than later:

“Washington can gradually phase-in these reforms while the economy is still strong and many near-retirees have time to adjust to any new policies. Or, it can wait until all 74 million baby boomers have already retired, benefits have been locked in, and deepening red ink (and possibly a recession) force more drastic reforms.”

What is the likelihood of lawmakers actually acting to reform these programs before deficit spending balloons even further? Members of Congress have written bills designed to make Medicare and Social Security more sustainable in the long run, but they are effectively dead in the water. Riedl laments that the political will, given the current political climate, is simply not there in either party.

“Republicans will not discuss the deficit because it puts them on the defensive over the 2017 tax cuts,” he wrote. “And Democratic presidential candidates are pouring gasoline on the fire by promising as much as $97 trillion in additional spending over the decade. It is a conspiracy of silence that will ultimately cost taxpayers and retirees dearly.”

Read the report from the Manhattan Institute about why deficits still matter.


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Image Credit: Photo by Vladimir Solomyani on Unsplash