Recently released data shows that the annual federal government budget deficit for the fiscal year 2019 increased to nearly $1 trillion. That’s more than 25% higher than the $779 billion deficit incurred during fiscal 2018. President Trump said during his campaign for president in 2016, that he would reduce the annual deficit. How will he do that?
First, let’s recognize the cause of the increase in the deficit. Contrary to what is being reported in the media, 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, causing an increase in the deficit. In order to reduce the deficit government spending will have to be reduced. 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 will increase faster than tax revenue. Spending has to be cut if the deficit is to be reduced or eliminated.
Politically, Trump is unable to reduce spending this year, but in 2021 Trump will likely confront this issue. The difficulty he faces is because more than 70% of the spending is currently viewed as untouchable.
This year the federal government will spend $2.8 trillion on Social Security, Medicare and Medicaid. Politically any cuts in this area are impossible, especially in a presidential election year. That represents 62% of spending.
Interest on the public debt will be $400 billion this year. That’s almost 9% of the budget and since the interest must be paid, that can’t be reduced either. That means 71% of spending, more than $3.1 trillion, is “untouchable.”
Of the remaining $1.4 trillion about half is spent on defense and the other half on 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 is also nearly impossible.
That’s because Trump recognized that the military was decimated during the prior administration. He needed to increase defense spending to rebuild the military. But the Dems in the House said they would only agree to increase defense spending if the increases were matched by similar increases in domestic spending.
So how will Trump fix this?
Defense spending, domestic program spending and interest on the public debt can probably not be reduced significantly. But the entitlements may be another story.
When Social Security was passed in the mid-1930s an American collected benefit at age 65. Since the life expectancy was 67, retirees collected for two years. In the mid-1960s when Medicare was passed, Americans collected the benefit at age 65. The life expectancy was 70, so people would only collect for five years.
With advancements in medical science life expectancy has increased significantly, yet the age to collect benefits remains at 65 for Medicare and now 67 for Social Security. The average life expectancy today is 76 for males and 81 for females. Most 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’s 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.
Remember both Social Security and Medicare are “pay as you go” systems meaning that those who are contributing to the system today are paying the benefits for those who collect. That system works as long as we have 6 or 7 people contributing to each one collecting. That number is down to less than 3 workers per collector. It will drop lower as people live longer.
There really is no good solution to this problem. 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. And raising the Social Security tax to 14.8% of wages instead of the current 12.4% as some have suggested, would put a drag on economic growth and could result in less revenue, not more.
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.
The age to begin collecting will have to increase to at least 70 and eventually 72 or even 75. That way more people are working and retirees will collect only for about 10 to 20 years. This won’t affect anyone already collecting or anyone who is five years or so away from retirement.
Trump realizes there is nothing he can do until after the 2020 election. He is hoping 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. And it will reduce the deficit.