America's national debt hit $35 trillion for the first time late last month, and with large budget deficits set to continue to push the debt to astronomical new heights in the decades ahead, an economist has put forward a bipartisan plan to stabilize the debt and avert a future debt crisis.
"If we want to avoid a debt crisis, significant reforms need to be phased in within the next few years, otherwise the debt grows too large, too many Baby Boomers are retired to absorb reforms, the cliff becomes too high," Brian Riedl, a senior fellow at the Manhattan Institute who focuses on budget, tax and economic policy, told FOX Business in an interview.
The share of the national debt held by the public is on pace this year to roughly equal the size of the U.S. economy in terms of gross domestic product (GDP), and the nonpartisan Congressional Budget Office projects it will reach 166% of GDP in 2054, based on current law. Riedl's 30-year budget blueprint would stabilize the debt-to-GDP ratio at 100% of GDP through a combination of tax and spending reforms that would require a bipartisan compromise.
"We're not going to address long-term deficits in a partisan way," Reidl said. "Neither party has the credibility to impose the huge spending cuts or tax hikes, in a partisan way, in order to address the deficit. So, the first thing you need is both parties to actually hold hands, jump together and put all policies on the table. Obviously, Washington is not near that level yet where the two parties will even acknowledge the deficit problem, much less get together."
Riedl's proposal would increase some taxes on businesses and upper-income households while also reforming Social Security and Medicare to reduce their spending, which is rapidly rising while the programs' funding mechanisms are under pressure. An average of 10,000 baby boomers reach retirement age per day, while the ratio of workers to retirees has fallen below 3-to-1 and is trending toward 2-to-1 in the next decade, leaving fewer taxpayers in the workforce.
The tsunami of retirees and workforce dynamics are depleting the two programs' trust funds, which are projected to be tapped out in the 2030s and would trigger automatic benefit cuts if that occurs. Overall, the two entitlement programs face a $124 trillion shortfall over the next 30 years.
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"Social Security reform is pretty straightforward. My proposal would gradually increase the retirement age by two years over the next couple of decades, and even increase the minimum benefit for low-income seniors by reducing the benefits for higher-earning seniors where Social Security would be about a standard $24,000 a year when you retire," Riedl explained.
"Medicare is more complicated because you have to fix the health [of the] economy first. My plan would move Medicare more into a system of choice and competition, where seniors would choose among competing plans, and this would reduce costs by about 8% as insurers compete for your business," Riedl said.
Riedl's plan caps federal discretionary spending programs and limits the annual growth in those appropriations while maintaining parity between defense and non-defense programs. It increases the top combined tax rate by 3.6%, raising the top income tax rate by 2.6% and the Medicare payroll tax rate by 1%. But it doesn't eliminate the cap on Social Security taxes because it would push marginal tax rates into the mid-60s for many top earners.
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Absent federal lawmakers assuming a leadership role in budget reform in the near future, Riedl said that for budget reforms to occur, voters would need to become "more concerned about deficit issues, which is unlikely until they start to feel the pain."
"The problem is, once you start to feel the pain – once the bond market stops lending to us, interest rates rise, inflation continues to rise, the market starts to dip – then you have the voters' attention, but it's also too late to do this in a less painful way," he explained.
Riedl said there's a roughly five-year window to implement budget reforms to stabilize, adding, "If we fail that test, the actual debt crisis is harder to predict."
HOW MUCH DEBT IS TOO MUCH DEBT?
"It could happen in five years, it could happen in 10 years, it could happen in 20 years. We don't know the exact date it will happen, but we do know it will happen because there's almost no way for Washington to borrow nearly $200 trillion over a 30-year period in order to finance these deficits," Riedl explained. "The financial markets simply will not be able to supply this much lending at reasonable interest rates."
Economists' predictions about what debt-to-GDP level would spur a debt crisis vary. Some estimates identified by the Congressional Research Service had a "danger zone" ranging from 80% to 200%, while the Penn-Wharton Budget Model said last fall it can't exceed 200% of GDP "even under today's generally favorable market conditions."
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"My hope is that we do not delay reform until ultimately the bond market forces reform by essentially saying we can no longer lend to Washington upwards of $200 trillion over 30 years, in which case Washington will have to cut spending and raise taxes drastically," Riedl said.
