WASHINGTON — Recently released data shows that the annual Federal government budget deficit for the fiscal year (FY) 2019 increased to nearly $1 trillion. That’s more than 25% higher than the $779 billion deficit incurred during FY 2018. President Trump said during his 2016 presidential campaign that he would reduce the annual deficit.
How will he do that?
First, let’s recognize the cause for the increase in the current deficit. Contrary to what the media reports, the tax cuts enacted in 2018 did not add one penny to the deficit. Total tax revenues were slightly higher in 2018 than in 2017. And tax revenues were higher in fiscal 2019 than in 2018. After the tax cut, revenues did not decline. So the tax cut did not add to the deficit.
Increased spending caused the deficit to increase.
Spending increased by $420 billion in 2019. That caused an increase in the deficit. To actually reduce the deficit, the government simply needs to reduce spending. But in today’s Washington, that won’t be easy.
This year, the Federal government will spend $4.5 trillion dollars. Although tax revenue will increase again this year, the deficit is likely to exceed $1 trillion, because spending still increases faster than tax revenue. Again, the government must cut spending spending in order to reduce or eliminate the deficit.
Politically, President Trump cannot reduce spending this year. But in 2021, Trump will likely confront this issue head on. The difficulty he faces: Washington views more than 70% of government spending as untouchable and off limits.
This year, the Federal government will spend $2.8 trillion on Social Security, Medicare and Medicaid entitlements. Politically, political Washington views any cuts in this area as impossible, especially in a presidential election year. That represents 62% of spending.
Debt on interest and income redistribution in the previous administration
Interest on the public debt roughly equals $400 billion this year. That’s almost 9% of the budget. And since the government must pay interest on the debt, the Feds can’t reduce that, either. That means 71% of spending, more than $3.1 trillion, remains “untouchable.”
Of the remaining $1.4 trillion, the government spends about half on defense. The other half goes to domestic programs. With the current makeup of Congress, where the Dems control the House of Representatives and the GOP controls the Senate, reducing spending on defense and domestic programs verges on the impossible.
Why? Because President Trump recognized that the previous administration decimated the military by “redirecting” military spending toward income redistribution and other leftist pipe dreams. Trump needed to increase defense spending to rebuild the military, which remained in a weakend state on the day of his inauguration. But the Dems in the House would only agree to increase defense spending if the president were willing to match those increases with similar increases in domestic spending.
Defense spending, domestic program spending and interest on the public debt can likely resist attempts to reduce that debt. But entitlements may prove a different matter.
A short history of today’s entitlement programs
When the government passed Social Security legislation in the mid-1930s, an individual American qualified to begin collecting those benefits at age 65. Since the life expectancy was 67 at that time, retirees collected Social Security for two years, at least according to then-current actuarial tables.
In the mid-1960s when Medicare went into effect, Americans qualified to collect that benefit also beginning at age 65. By that time, the average life expectancy had advanced to age 70. So people would only collect for five years.
Since then, advancements in medical science life expectancy have increased that number significantly. Yet the age for collecting benefits remains at 65 for Medicare, while it has advanced to age 67 for Social Security as more Boomers phase into their retirement years. The average life expectancy today is 76 for males and 81 for females. Most current investment advisors say that retirees should plan to live 18-20 years after retirement.
As medical science continues to advance, life expectancies could rise significantly. Some futurists predict that Americans could live to be 125 years old by 2070. If that proves true, under current laws,an American could work for 40 or 45 years and then collect Social Security and Medicare benefits for the next 50 years or so. Obviously that is not sustainable.
Updating a “pay as you go” system for the 21st century
Remember that both Social Security and Medicare exist as “pay as you go” systems. Those who contribute to the system today pay for the benefits of those who collect them. That system actually works as long as we have 6 or 7 people contributing to each individual that benefits. But that “cushion” has declined currently to less than 3 workers per collector. As people live longer, the number of those paying into the system continues to drop.
Currently, no good solution exists to solve this problem. And no good solution to a problem means we look for the solution that is least bad.
Benefits cannot and should not be decreased for those who currently depend on them. They tailored their retirement plans based on government estimates they believed accurate.
And raising the Social Security tax to 14.8% of wages instead of the current 12.4% as some suggest, would put a drag on economic growth. This could result in less revenue, not more.
An alternative to raising taxes. Again
If taxes can’t increase and current spending levels can’t decrease, then what is the answer? The solution is to have fewer people collecting in the future while having more people contributing. The way that happens is to significantly raise the retirement age, similar to the way it was raised in the 1980s to the current level.
The age to begin collecting benefits likely must increase to at least age 70, and eventually to age 72 or even 75. That way, more people will remain working and retirees will collect only for about 10 to 20 years. This won’t affect anyone already collecting benefits or anyone currently five years or so away from retirement under the current system.
So how can President Trump fix this?
President Trump realizes there he can do nothing until after the 2020 election. He hopes that after he wins re-election, his coattails lead to a GOP majority in the House and a larger GOP majority in the Senate. Then he can take action to gradually raise the retirement age.
While that won’t be popular, it is the least bad solution. We’ve already done this once and it worked. Doing the same thing again, using current date can and will reduce the Federal government deficit.
— Headline image: The Yellow Kid weighs in on Capitol Hill budget inaction.
(Out of copyright vintage cartoon modified by CDN)