The United States, though being the wealthiest, most influential and most powerful country in the world, for all its strengths, has its weaknesses as well. Being an economist, I want to discuss three points in particular that I’m worried about concerning the U.S’s future and status as a superpower. In this article, I argue that if the U.S government keeps on maintaining the same policies as the last 20 years, it will gradually wane and may even go bankrupt.
1) Medicare, Social security, and healthcare expenditure: Right now, it is projected that over 77 million baby boomers will retire within the next 2 decades. This will have a dramatic affect on the cost of Medicare and Social security. The congressional budget office predicts that if we maintain the same level of health care benefits, health care costs will soar to about 40% of government spending in 2020 and gradually cause the U.S debt level to be 100% of its GDP, if we extend it to 2085, the projection is that debt will reach 600% (!) of U.S GDP. That is truly a scary number. It is directly a result of a pay-as-you go system, where seniors retire and push the costs of their retirement to future generations. To close the fiscal gap, the solution is to cut medicare benefits by 2/3s (a scary thought), double income taxes (another scary thought) or cut government spending by 134% (not feasible nor possible). Another solution is to privatize social security and medicare entirely, or to raise retirement age to around 70. Either way, something has to be done in the near future.
2) Taxes: Despite Americans thinking that they pay too much tax, actually from an economists point of view, they don’t pay enough. The optimal amount of marginal tax rate in the highest bracket is determined to be about 40-50% (where marginal revenue is equal to marginal benefit). Right now, with the Bush tax cuts, they are about 35%. When you compare taxes in the U.S to that of Canada or Europe, Americans actually pay much less tax. Another thing is that the U.S has no VAT (value added tax) at the federal level. Some states have no income tax, no sales tax, or both. The US provides farm and gas subsidies that are much higher than other developed countries (which is same thing as not getting enough tax). All these low taxes have the effect of not producing enough revenue for the government. As a result, we run into the same problems as in 1), how can the federal government or state government pay for retirement and healthcare benefits without having enough tax revenue. At current levels, clearly it’s unsustainable, and its clear that eventually taxes will have to be raised.
3) Pensions: State governments are in crisis right now, not only is the country in a recession, but they have to pay large amounts of pension benefits to many people, part of this is due to a loophole where the highest salaried government job determines what pension you get. As a result, people can ‘double dip’ and earn six figures while also receiving six figure pensions. Clearly this is unsustainable, and the reason why many states are on the brink of defaulting. California for example, has already had to slash its budget on many expenditures such as education, raise tuition levels, etc, and it’s still in a big hole. Again, mostly because of unsustainable pension payouts. New Jersey is predicted to be the first state to default, according to its expenditures, in the next decade, pension payouts will constitute 100% of the state expenditure (!).
All of these points raise truly terrifying prospects for the future generation of Americans. The situation in the U.S is bleaker than that of many other developing countries, because of the way Americans have been living on a life of low taxes, a pay as you go health care system, and broken pension costs. Eventually these issues will have to be dealt with, if politics prevent any of these solutions that I mentioned, then the U.S will be on its way to bankruptcy, and having unimaginable debt levels. Truly, something will have to give eventually, it’s only a matter of time. Let us hope that politicians will (eventually) put country ahead of politics, and aim to reform the broken pension, health care, and tax systems.
Edit: Now that it’s certain that current tax rates will continue (actually lower because of the 2% reduction in payroll taxes), the projected deficit with current spending levels and tax rates is projected to be $55 trillion by the time that a person my age will retire (around 2050).
References:
L.J. Kotlikoff, 2006, “Is the United States bankrupt?” Federal Reserve Bank of St. Louis Review, 235-250.
Alan Auerbach, “Deja vu all over again: On the dismal prospects for the federal budget”, NTJ 2010.