An aging population, combined with low economic growth in the future means that the United States will have more financial obligations, and less money to pay them off.
These circumstances may well create a long-term economic “death spiral”.
As part of my application to Northwestern University’s Masters in Public Policy and Administration program, I was required to write a ten-page paper on a policy issue facing our country. In my essay, I made note of how my interest in Public Policy stems from the fact that it allows those who study it to better understand the interconnectivity of societal issues. So, I began by pointing out how an increasingly automated labor force will, over time, increase economic anxiety to a level that threatens democracy. As such, I “proposed” that the US respond to this burgeoning challenge by reforming our educational system to equip students with a 21st-century skill set while also instituting an income floor for all adults.
In this article, it is my intention to take this theme of “interconnectivity” and lay out how seemingly unrelated issues are bundling together to form what I assess to be the United States’ greatest challenge. The root of this challenge is one of demographics, but as we will see this issue is being compounded by irresponsible and short-sighted fiscal decisions, a ballooning of entitlement and interest expenditures, as well as a long-term production plateau. It is not the intention of this article to definitively state the impact these trends will have on the United States, but instead, my intention is to share with you an idea of mine and allow you to judge whether or not it holds merit. As always, your feedback (be it negative or positive) is appreciated.
Above, a 2014 population pyramid for the United States is shown next to a 2060 projected population pyramid. These population pyramids allow us to see the age make up of any particular country, and with it, the demographic challenges they may face. In the 2014 population pyramid, the share of citizens who are still of working age (years 20-65) is comfortably larger than those of non-working age. This is important, because critical programs like Medicare and Social Security, which are largely enjoyed by this country’s elderly, are paid for by the payroll taxes of working individuals and their companies. So now, take a moment and look at the 2060 pyramid and try to guess where I’m going with this.
In the 2060 pyramid, we can see that the number of individuals above 65 will make up a significantly larger share of our population. In fact, by 2030 the Congressional Budget Office projects that our country will have more retirees than children for the first time in history, and this is clearly reflected in the 2060 pyramid. Due to this dynamic, our working population will be comparatively smaller than it ever has been, which means the burden on our labor force will be larger in the coming years than at any point in history. Even on its own, this dynamic will make it significantly more difficult to fund programs like Medicare and Social Security, but there are more issues further complicating the matter.
The table above is a year by year comparison of the amount of money the US has paid as interest on the national debt. As I explained in an earlier article, our national debt accrues from borrowing, and borrowing always has a cost. In order for a lender to provide immediate funds, they must be paid interest or there is no incentive for them to lend in the first place. The figures above are how much we paid in interest, and as you can see, the amount of money paid to expense our debt has grown steadily from $214B in 1988 to $458B in 2017.
As the national debt grows, a larger percentage of federal revenues will be needed to finance it. In the pie graph below, we can see that a sizeable slice (7%) of federal revenues go towards interest payments that are the result of borrowing.
Before continuing, it is important to note that the US Government has long devoted a slice of revenues towards interest expenditures; and even though the amount of dollars allocated towards interest expenditures has grown steadily, so too has economic and workforce growth. However, as we saw in the population pyramids, our workforce is going to be comparatively smaller in coming years due to the large number of baby boomers set to retire by 2030. As such, it will be important to discuss some of the implications of this trend.
The United States has generally enjoyed 3.2-4.0% economic growth throughout its history, and this economic growth meant that our increases in debt could be paid for relatively easily (more growth = more tax revenue). However, The United States is now entering a period of low growth due to a number of factors, one of which being our aging population. The Federal Reserve, taking into account the recent tax cuts, recently made growth projections for the next few years and they are as follows: 2.7% in 2018, 2.4% in 2019, and 2.0% by 2020.
So, while our economy will continue to grow in the future, we can see that each year will bring about less and less growth while, at the same time, more and more individuals will retire and go from contributing to federal revenues by paying income/payroll taxes to consuming federal revenues by way of receiving government funds from programs like Social Security and Medicare. What happens when there are fewer people paying for a program than there are people receiving money from it?
To add insult to injury, interest rates are now rising from their historic lows, which will make government borrowing even more costly.
Above, we can see how, as a result of everything we’ve just discussed, the United States is set to experience a significant gap between expenditures and revenues in the not-so-distant future. The responsible approach to this issue would be to slowly raise taxes over time, while also making the necessary budget cuts. Ideally, this process would take 10-20 years. However, the United States has long suffered from political short-sightedness, and therefore this gap is more than likely going to be filled with more borrowing. This borrowing will further increase future interest expenditures, creating a self-defeating cycle that will become more and more difficult to correct as time goes on. Eventually, these inflationary policies will necessitate higher interest rates from foreign borrowers, who see investment in the US as increasingly risky. As a result, the United States will have even less funding to invest in education, defense, infrastructure, and other important programs.
What this means, is that instead of spending money on investments for the future, we will be spending more and more money to correct the mistakes of the past. What is most concerning, is that neither political party is getting this right. Republicans just passed an immensely irresponsible tax bill that is under-delivering on macroeconomic results, while increasingly progressive Democrats seem eager to promise inordinate amounts of spending in order to satisfy their political bases.
As the amount of money needed to fund Social Security, Medicare, and interest expenses continues to increase, the United States will be increasingly limited on its ability to protect its interest and invest in its future. In the absence of a long-term, politically insensitive approach, our government will continually opt for short-term fixes that only end up exasperating the issue (CC: more borrowing). What makes this such a significant challenge is that correcting these issues will never be pleasant, but the longer we wait, the more difficult it becomes.
As we’ve seen, many in the United States have an increasing propensity to preclude themselves from any sort of intellectual debate. Democrats will defend Democrats and Republicans will defend Republicans no matter what the facts state. What we are experiencing is a sort of political tribalism, where we engage in zero-sum politics in which one side must win and the other must lose.
What is ironic though, is that the issues facing our country do not discriminate. They will impact all of us, regardless of political party; and before too long each and every one of us will be paying the price. Therefore, it would be my recommendation that our government begins thinking of long-term solutions to these issues, but what do I know anyway?