America’s fiscal health and economic strength are closely linked. Building a solid fiscal foundation supports a strong and prosperous American economy. Putting our nation on a more sustainable long-term fiscal path will give our economy the best chance to succeed. A strong fiscal foundation creates the conditions that encourage growth, enabling an environment with greater access to capital, increased public and private investments, enhanced business and consumer confidence, and a solid safety net. These factors, in turn, create a more vibrant economy, with rising wages and greater productivity and mobility for America.
Unfortunately, despite recent improvements in near-term deficits, America remains on a dangerous long-term fiscal path.
The non-partisan Congressional Budget Office (CBO) projects that national debt could rise to as much as 175 percent of gross domestic product (GDP) by 2040. That level of debt would far exceed the historical average of approximately 40% debt to GDP.
One of the most damaging effects of rising debt is rapidly growing interest costs. Under current law, CBO projects that interest payments on the debt will more than triple over the next 25 years, climbing from 1.5% of GDP in 2016 to 4.3% of GDP in 2040. Under less optimistic assumptions, interest costs are projected to almost quintuple over the next 25 years to 6.3% of GDP. By 2023, CBO projects that interest costs alone could exceed what the federal government has historically spent on R&D, nondefense infrastructure, and education combined; by 2050, they could be more than three times historical spending on those investments, as a share of GDP.
What is causing the growth of our national debt? The growth of our debt stems from a fundamental imbalance between spending and revenues. Under current law assumptions, CBO anticipates that federal spending will grow from 20.3% of GDP in 2014 to 25.3% of GDP in 2040. Revenues are also projected to increase during this period, growing from 17.5% of GDP in 2014 to 19.4% in 2040 — but not by enough to match the projected growth of federal spending. Under less optimistic alternative assumptions, the mismatch between spending and revenues is even more pronounced.
There are two primary drivers behind the large growth in spending: America’s population is aging and healthcare costs per capita are rising. The most significant driver of spending is simple, predictable demographics. The large Baby Boom generation of 76 million is just beginning to retire. In addition, we are all living longer. While this is great news, it also means that we will spend more years in retirement.
In the coming decades, these factors will add substantially to the number of people that are supported by federal retirement programs like Social Security and Medicare. By the time the Social Security trust fund is insolvent in 2034, the total number of beneficiaries is projected to reach 89 million, 50% more than in 2014. Over the same period, the ratio of workers paying taxes to support each Social Security beneficiary will decline by a third, from 3:1 to 2:1.
The other primary driver of spending is growing healthcare costs per capita. Although healthcare costs per capita have grown less rapidly in recent years — which is welcome news — some of this slowdown may be due to a weak economy following the recession, rather than permanent gain in efficiencies in the healthcare sector. Moreover, even after incorporating the slowdown into its projections, CBO still expects that current-law spending on major healthcare programs will rise sharply from 4.8% of GDP in 2014 to 8.0% of GDP in 2040. CBO also projects that healthcare spending by all sectors of the economy — government, business, and consumers — will climb to 25% of GDP by 2040.
With retirement and healthcare programs growing at a faster pace than tax revenue, our fiscal outlook is unsustainable — and that affects our economy. Within the budget, rising interest costs will crowd out programs that help ensure our future, including education, transportation and other physical infrastructure, research and development, and national security. Increased federal borrowing also crowds out private investments that promote growth in the economy. In addition, programs that protect the most vulnerable Americans could face sharp, sudden reductions if we don’t have a sustainable fiscal outlook.
The good news is that this problem is solvable. We can choose a better path — a path of stabilized debt, faster economic growth, broader prosperity, and enhanced economic opportunity and mobility.