Economist warns U.S. debt has a roughly 20-year fiscal window
Penn Wharton’s Kent Smetters says federal debt could approach an outer limit as spending remains heavily tilted toward older Americans.
By Daniel Okafor · Business Editor
3 min read
The U.S. may have about two decades before federal debt reaches a level that leaves policymakers with fewer workable options, according to Kent Smetters of the Penn Wharton Budget Model. His warning centers on rising debt, health costs and a federal budget that directs far more support to older Americans than to younger people.
Smetters, faculty director of the Penn Wharton Budget Model, told Fortune that U.S. policy creates strong incentives for each generation to leave costs to the next. He said the federal government spends about 10 times as much per older person as it does per younger person, and about six times as much in total on older people as on younger people.
PWBM estimated in April that adults 65 and older receive $2.7 trillion in federal spending. That equals 38.6% of all federal outlays and 61.9% of spending that can be assigned by age group, according to the model.
By comparison, PWBM said adults ages 26 to 64 receive $1.2 trillion, or 27.9% of age-assignable spending. Children and young adults under 26 receive $449 billion, or 10.3%.
Debt limit in the model
In a separate analysis, Smetters and PWBM estimated that federal debt cannot reasonably rise above about 210% of gross domestic product. Smetters described that level to Fortune as an upper boundary, not a manageable goal.
His argument, according to the report, is that above that point a broad tax on labor income would not be enough to cover interest costs at the returns investors would require. The timing depends heavily on health care spending, which has tended to grow faster per person than the wider economy.
Under PWBM’s historical health-cost growth assumption, the U.S. would likely reach that boundary in roughly 20 years, the model found. PWBM also put the chance of reaching it within 14 years at one in four.
The model identifies a “closure year,” meaning the last year in which lawmakers could still restore fiscal sustainability with a feasible tax change. PWBM put that year at 2045 under faster health-cost growth and 2051 under more favorable assumptions.
Smetters told Fortune that financial markets can keep funding the government as long as investors believe Congress will eventually act. He said markets could turn at any time if that confidence breaks.
Social Security pressure
Smetters also tied the debt debate to the politics of retirement programs. He told Fortune that Americans often treat government-backed benefits as personal property, even when taxpayers supplied most of the funding.
That view shapes Social Security politics, he said. PWBM has projected that the main retirement trust fund will be depleted around 2032, and Smetters said that date has since been confirmed by the Social Security Trustees and the Congressional Budget Office.
Once that fund runs out, Smetters estimated, Social Security would be able to pay about 83% of scheduled benefits, with that share declining over time. He told Fortune he does not expect the approaching deadline to guarantee early action, citing the 1983 Social Security changes as an example of Congress waiting until close to a crisis.
The dates also overlap with the period in which baby boomers are expected to lose some of their economic and political influence, Fortune reported. Smetters was cautious about drawing a direct generational conclusion, but he framed the budget problem as one in which current voters and lawmakers have reasons to defer costs.
This story draws on original reporting from Fortune.