Update on America’s Fiscal Crisis

Update on America’s Fiscal Crisis

Amidst many concerning programs, Medicare and Medicaid stand out as key culprits.

(SOURCE: Adobe Firefly)

In September of 2022, I wrote about federal government finance focused on arguably unauthorized and unlawful student loan debt cancellation. As a former professional bond trader and portfolio manager, I emphasized the traditional debt to gross domestic product (GDP) ratio as a telltale signal. My purpose here is to go a good bit deeper and use contemporary public data to raise a more critical perspective on how far and fast our national debt crisis has progressed.

In May, the Congressional Budget Office (CBO) forecasted a $2 trillion deficit for the fiscal year ending September 30. This is on top of combined deficits for the prior two years of $3.1 trillion, a record contributing significantly to the inflation surge in the past three to four years.

Looking 10 years ahead, CBO estimates a $2.8 trillion gap for 2034, an increase of 40% versus 2024. Over the same 10-year period, they estimate the adjusted accumulated deficit will equal 6.9% of GDP compared with the average of 3.7% over the past 50 years.

Looked at another way, debt held by the public rises from 99% of GDP in 2024 to 122% in 2034. What is going on here? “Houston, do we have a problem?”

The American Main Street Initiative (AMSI), a respected American-based consultancy, provides helpful insight using both CBO and White House reports. They conclude that mandatory spending, not insufficient taxation, is the root cause. And, rather than Social Security, they identify Medicare and Medicaid (M&M) as by far the greatest culprits.

For context, in 1975, the combined cost of the two programs consumed 7% of all tax revenues, while in 2019 they cleared 30%. More telling, from 1967 through 2020, M&M cost a combined $17.8 trillion, while our combined deficits over the same period were $17.9 trillion, meaning our deficit problem is essentially a Medicare and Medicaid one.

Thankfully, the Balanced Budget Act of 1997 created the National Bipartisan Commission on the Future of Medicare. In 1999 it attempted to fix Medicare spending and proposed solutions that can always be revisited.

When created, Medicare and Medicaid were not provided with sustainable revenue streams, resulting today wherein payroll taxes cover approximately one-third of Medicare’s costs and none of Medicaid’s. A companion benefit program dating to the 1930s, Social Security, uses payroll taxes, income taxes, and trust fund interest to support about 90% of expenditures. As a result, its smaller funding gap can be actuarially rebalanced by simply adjusting the retirement age. Similarly, a tool available to fix Medicare is to raise the accessible age for coverage. This is a controversial but workable solution.

Other ideas, include raising the profile of more efficient private sector health plans; studying risk-sharing and seeking innovative financing approaches; allowing part D (the prescription drug program) administrators more clout to negotiate costs; restructuring benefits; introducing competitive bidding such as currently drives Medicare Advantage plans; and looking for additional revenues, such as pay-as-you-go taxes and, perhaps, eliminating Medicare taxes and rolling them into a broadened federal income tax base.

AMSI reports Medicaid funding is driven by a formula, whereby every $1 of state spending releases $1 to $9 dollars of federal spending. The more a state spends, the more it costs the federal government, certainly creating a budget challenge.

Some states hire professional consultants to create spending programs for other purposes but present it as Medicaid spending, siphoning off federal dollars for non-healthcare purposes. A simple fix would be to allocate only a fixed amount of spending to each state, none of it tied in any way to state healthcare spending. A Medicaid system overhaul with better fraud controls will discipline both state and federal healthcare spending.

A complete federal government takeover of the healthcare system, converting to a Great Britain or similar national insurance model, risks shortages of medical professionals and access to services, limited availability of hospital and downstream care infrastructure, and long patient wait times. All are potentially disruptive outcomes, in addition to the budgetary impacts.

I will close where I started with a brief piece of news about the ongoing student loan debt cancellation program. CBO analysis indicates that, as of May 2024, $145 billion of this year’s estimated $2 trillion deficit will result from student debt cancellation. Fortunately, state legal challenges and court decisions have scuttled most of the program, although the Biden administration has already forgiven $169 billion in student debt.

But the CBO estimates, in part due to the student loan debt cancellations, that for every $10 of revenue, more than $14 in spending will occur. This is hardly a winning combination or evidence of a serious concern with the nation’s fiscal problems. One hopes America can be more alert to the looming risks and begin to undertake an earnest problem-solving mindset.

The information for this article was gathered from a number of sources. They include: An Update to the Budget and Economic Outlook: 2024-2034 published in June 2024 by the Congressional Budget Office; Fiscal Train Wreck by James A. Bacon, Bacon’s Rebellion, August 9, 2024; The National Debt published by The American Main Street Initiative, Quick Hits Issue No/1, February 2023; and America’s Debt Emergency by Jeffrey H. Anderson, published in City Journal, August 8, 2024.

[The opinions expressed in this magazine are the author's own and do not reflect the official policy or position of The Spectator, or any students or other contributors associated with the magazine. It is the intention of The Spectator to promote student thought and civil discourse, and it is our hope to maintain that civility in all discussions.]

Tom Rideout is a 1963 alumnus of Washington and Lee University and now retired from a life spent in banking, bank technology consulting and higher education.  He was the elected president of the American Bankers Association during the Savings and Loan crisis of the late 1980’s.  He closed out his formal working career in 2011 as Director for Corporate and Alumni Affairs at William & Mary’s Raymond A. Mason School of Business.  He also served as a volunteer Executive Partner there for 15 years, where he specialized in leadership and career coaching.  As a Washington and Lee alumnus, he was tapped into the Alpha Circle of ODK in 1990.  In 2015, he was named an Honorary Alumnus of The College William & Mary..  He is currently serving as Co-Founder and volunteer Chair of The Generals Redoubt; Co-Founder and volunteer Secretary and Chair of the Governance Committee of the Alumni Free Speech Alliance; and Co-Founder and Secretary of Hope Family Village of Williamsburg, VA, a cohousing community offering unwavering acceptance and sustainable support for people with mental health conditions and their families.