The U.S.' Finances: The Tough Facts
With the “fiscal cliff” right around the corner and with the U.S. government brushing up against the debt ceiling again, the U.S. government’s finances will be a focal point for the next few months. However, it would be naïve of any individual to believe that this discussion will disappear. As politicians continue to “worship the great god of reelection,” it has become increasingly frequent that decisions on taxes and spending continue to be pushed off. The Simpson-Bowles debt committee could not even get their budget to be voted on by either the House of Representatives or the Senate. Their work, along with several organizations and reports, including one by Mary Meeker, came to at least one conclusion: the U.S. is in dire straits and the government needs a substantial restructuring of their “income statement” or else the debt problems currently occurring in Europe and Japan could occur in this country in the near future.
- The U.S. ran a $1.29 trillion deficit in its fiscal year 2010. On the expense side, Social Security, Medicare, and Medicaid were the cause of 44 percent of the government’s spending. This has become an alarming trend. In 1966 approximately 20 percent of the American population received entitlement dollars. Today that has risen to over 35 percent. Along with defense and unemployment insurance, these categories accounted for over 75 percent of total expenditures. For fiscal year 2011 the percentages remained very similar, amounting to a $1.30 trillion deficit. At the same time, high expenses could be covered with high revenue. The average income tax rate for an American citizen is approximately 13 percent. In order to cover expenses this tax rate would have had to double – without even including the negative effects that higher tax rates would likely have on GDP growth.
- Of the three entitlement programs, Social Security is the dog with the least flees. Since the program was created in 1935, average life expectancy has increased by 38 percent but the age at which an individual would be eligible for full retirement benefits has only increased by 3 percent. Presently there are 36 million people over the age of 65, which is more than four times the number that had to be supported when the system was created. According to David John of the Heritage Foundation, in order to “keep the proportion of one’s life spent in retirement roughly the same as it was in the 1940s, the [government] needs to increase to 70 years and five months no later than 2035.”
- In order to eliminate current unfunded liabilities, Medicare benefits would have to be cut by 53 percent and/or Medicare tax rates would need to increase from 2.9 percent to 6.8 percent. Furthermore, government projections of future health care benefits have been inaccurate to say the least. In 1965, when Medicare was created, the House estimated that Medicare Part A would cost about $9 billion annually by 1990. Actual Part A spending in 1990 was $67 billion. In 1967, the House estimated that the entire cost of Medicare in 1990 would be about $12 billion. Actual Medicare spending in 1990 was $110 billion.
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Bowles: We Worship the Great God of Reelection. 30 Mar 2012. Bloomberg. 25 Nov. 2012.
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