• <div class="header-image" style="background-image: url(/live/image/gid/4/2611_Header_V6N2_web_4.rev.1518551584.jpg);">​</div><div class="header-background-color"/>

The State of the National Debt

November 07, 2016

In the frenzied analysis following the third presidential debate, one issue appears to have gone virtually unaddressed: the national debt. As of October 21, 2016, the total public debt outstanding was $19.8 trillion, and the nonpartisan Committee for a Responsible Federal Budget suggests that neither Hillary Clinton nor Donald Trump’s current tax plans will do anything other than increase that number, despite their insistence otherwise. In this article we will explore the current state of the national debt and discuss its impact on the federal budget, especially spending on entitlements, as well as the political atmosphere in the United States.

The national debt is defined as the cumulative sum of each year’s budget deficits minus any offsetting government surpluses. Economists usually measure the size of the national debt as a percentage of annual gross domestic product (GDP). This figure is called the debt-to-GDP ratio. Currently, the debt held by the public is approximately $14 trillion, which is 77% of the United States’ annual GDP. In August, the Congressional Budget Office (CBO) estimated that the 2016 deficit, the annual excess in the government’s spending over its revenue, would total $590 billion, or 3.2% of GDP. This would represent the first increase of the federal budget deficit in relation to GDP since 2009. Additionally, assuming that current laws remain unchanged, the CBO projects that the debt held by the public would rise from 77% of GDP at the end of 2016 to 86% of GDP by 2026. This continues a recent trend: From 2008 to 2012 the federal debt-to-GDP ratio grew 31 percentage point–the highest annualized growth since World War II.

Federal Debt Held by the Public from 1940-2020<em> (Image: Graph of Debt-to-GDP ratio. Source: <a href="https://www.cbo.gov/sites/default/files/cbofiles/images/pubs-images/51xxx/51129-home-summaryfigure1.png" target="_blank">Congressional Budget Office</a>)</em>

Impact on Entitlements

Despite the continual growth of the national debt, the federal government is still paying a relatively low interest rate of 2.23% on its debt. However, the debt does pose a threat to entitlements. Entitlements are an overarching name for all of the federal government’s transfer payments, which are income redistribution programs. The overwhelming majority of entitlement spending goes towards Social Security and Medicare which made up 24.1% and 14.8% of federal government spending respectively in 2015.

During the third presidential debate, the candidates were asked, “Would [you] make a deal to save Medicare and Social Security that included both tax increases and benefit cuts, in effect a grand bargain on entitlements?” There has always been political debate over entitlements, but the question is particularly pressing now because boards of trustees of the Social Security, formerly known as Old Age, Survivors, and Disability Insurance (OASDI), and Medicare have become increasingly uncertain of their ability to pay out scheduled benefits to the United States’ aging population.

The Pew Research Center projects that between 2015 and 2035 the percent of the population that is over 65 will grow by 6.3%. As a result, the White House Office of Management and Budget predicts that Social Security and Medicare spending will both increase by 38% between 2015 and 2021. Without any meaningful reform, the 2016 OASDI Trustees Report predicted that the fund will be unable to pay scheduled benefits in 2034, and the Congressional Budget Office has an even bleaker outlook, predicting the trust will be insolvent by 2029.

<em>(Image: Graph of projected Social Security Trust expenditures and income. Source: <a href="https://www.cbo.gov/sites/default/files/cbofiles/images/pubs-images/51xxx/51129-home-summaryfigure1.png" target="_blank">Social Security Administration</a>)</em>(Image: Graph of projected Social Security Trust expenditures and income. Source: Social Security Administration)

Medicare costs are also rising quickly as Baby Boomers age and become eligible for benefits. The 2016 Medicare trustees’ report predicts that the trust will be insolvent by 2028. Without reform, both trusts will be forced to automatically bring benefits in line with revenue when they become insolvent. The consequences of this are bound to be universally unpopular. OASDI trustees claim it would take a 3.58% increase in payroll tax and a 21% reduction of scheduled benefits to save Social Security after its trust fund’s insolvency. This would be in addition to a 0.9% increase in payroll tax and 13% reduction of benefits required to save Medicare, after its predicted insolvency six years earlier.

<em>(Image: Graph of predicted growth rates Medicare costs and income. Source: <a href="https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/downloads/tr2016.pdf" target="_blank">The Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds</a>)</em>(Image: Graph of predicted growth rates Medicare costs and income. Source: The Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds)

Political Implications

Despite the best efforts of trustees to extend the trust’s ability to pay scheduled benefits, demographic and political pressures have left them dangerously close to insolvency. With automatic tax increases and benefits cuts looming, Congress must take action. Though both Democrats and Republicans want to protect entitlements, the rising costs, political intransigence, and failure to enact reforms may trigger another debt ceiling crisis. A debt ceiling crisis occurs when the national debt exceeds the debt ceiling–the total amount of money that the United States government is authorized to borrow via the U.S. Department of the Treasury to finance its legal obligations.

In the past, Congress simply raised the debt ceiling as the national debt approached it. Since 1944, it has been increased 94 times. But recently, instead of raising the debt ceiling, some politicians have used it as a political football to gain more influence over the federal budget. This behavior has been triggered two major debt-ceiling crises in the last five years–one in 2011, and another in 2013. The 2011 debt-ceiling crisis led several credit rating agencies to downgrade the United States’ credit ratings for the first time. The Government Accountability Office’s report concluded that “delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011.” The 2013 crisis caused a 16-day government shutdown until legislators could come to an agreement on raising the ceiling.

<em>(Image: Graph of the National Debt Ceiling over time. Source: Office of Management and Budget)</em>(Image: Graph of the National Debt Ceiling over time. Source: Office of Management and Budget)

The effects of debt-ceiling brinkmanship go beyond the Treasury and government functions. During the 2013 crisis, Equity markets fell by 20% and Americans lost $2.4 trillion in household wealth. According to the Treasury, an unprecedented default “has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, United States interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.” 

Despite these consequences, some members of the Freedom Caucus have referred to a default as a form of “tough love.” These ultra-conservative Congressmen refuse to abide debt ceiling increases without comprehensive spending cuts. They describe the debt ceiling as a “constitutional tool” that can and should be used to reign in government spending. Most conservatives seek a compromise between this extreme position and the liberal position that the debt-ceiling is too important to be used in negotiations. President Barack Obama himself has refused to negotiate on the debt-ceiling in spite of the Freedom Caucus.

The only certainty about the federal debt is that it will continue to increase as all factions remain unwilling to compromise on a long-term solution.  According to the Bipartisan Policy Center, the next debt-ceiling, $20.1 trillion, will be reached in mid-March of 2017, two months after the next President and Congress are sworn in.

Policy Proposals for Reducing the Debt

When the United States reaches the debt ceiling in 2017, Congress will again debate proposals for reducing the deficit.There are primary solutions – cutting government spending or increasing taxes. Conservatives prefer the former, while liberals advocate for the latter.

Conservative Reform

House Republicans proposed a budget plan in March of this year that slashes spending by $5.5 trillion over the next ten years from budgets projected to spend almost $50 trillion. This plan avoids tax increases overall and contains more than $1 trillion in savings from unspecified cuts to government programs such as the Supplemental Nutrition Assistance Program (SNAP), formally known as the Food Stamps Program, and other welfare programs.

The budget also reforms and restructures Medicare, Medicaid, and Food Stamps. The proposed Medicare reforms would transform the system into a voucher program that subsidizes purchase of health insurance on the open market. Conservatives argue that this change would ensure the program’s long-term financial viability and spur healthcare innovation. The budget would also transfer responsibility for Medicaid and Food Stamps entirely to state governments. Under this reform, the federal government would only be responsible for subsidizing the costs of the programs with block grants. This approach would enable Congress to cut spending without explicitly cutting benefits or raising taxes; revenue realignment would fall to state legislatures.

Liberal Reform

Liberal policy proposals tend to raise taxes on wealthy individuals and corporations to bridge the gap between revenues and expenditures. For example, Hillary Clinton’s tax plan–a prototypical liberal tax regime–would implement progressive taxes on top-earners to raise revenues. The most significant proposal in Clinton’s plan is a very progressive “fairness tax.” Implementing this tax would increase the estate tax–a tax that the IRS levies on the estates of deceased persons if they’re worth more than $5.46 million dollars.

Clinton’s fairness tax would also reform the taxation of carried interest capital gains–the income fund managers earn from returns on their investments. Currently, the IRS subjects these gains to the federal capital gains tax; Clinton’s plan would subject them to federal income taxes instead. Americans for Tax Reform predicts that the fairness tax reforms would generate $400 to $500 billion together.

Clinton’s plan also proposes an “exit tax” on the unrepatriated earnings of companies that execute tax inversions. Analysts expect the exit tax to generate about $80 billion in tax revenue. As a result of these new taxes coupled with an increase in existing taxes, Moody Analytics predicts that the plan would increase federal revenues by $1.46 trillion over ten years.

Conclusion

The mounting national debt poses both a political and economic challenge that has gone largely undiscussed. However, it appears that hitting the debt-ceiling in 2017 will at least spark a national debate on the issue, hopefully leading lawmakers to take the timely action needed to save entitlements and resolve this issue in the short-term.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>