America’s $35 trillion national debt is its biggest unsolved massive issue. It is expanding at an unsustainable rate, and Americans will soon have to make some difficult decisions.
Regarding the impending sacrifices, neither of this year’s presidential contenders—Democrat incumbent Joe Biden nor Republican opponent Donald Trump—is being honest with the electorate. Without affecting benefits in the financially crippling Social Security and Medicare programs for retirees, Biden wants to increase taxes on corporations and the rich. Trump acts as though adding additional supply-side tax breaks and fresh import tariffs will miraculously fix the issue.
The truth about how to reduce the debt is essentially never spoken by politicians, as there is always something to be hated. Telling the truth and winning an election are mutually exclusive since so many voters are offended by the inevitability of tax increases, spending cuts, and benefit reductions.
However, there are answers. Budget expert Brian Riedl lays out a number of steps Congress may take to stabilize government borrowing and prevent a debt crisis that might lead to skyrocketing interest rates, uncontrollable inflation, or both in a new research for the Manhattan Institute. It is not necessary for the US to pay down its whole national debt. All that has to be done is set it at roughly 100% of GDP and maintain it there. Furthermore, the steps Riedl suggests are not as drastic as those that will be required should Washington procrastinate and wait until the very last minute to deal with the issue.
The math of debt has a few rules. One is that since the wealthy are where the money is, taxes on them will need to be raised. At the start of 2024, the richest 1% of earners controlled 16.8% of the nation’s wealth, up from 14% in 1990, while the bottom 50%’s share slightly decreased. A larger tax burden on America’s wealthiest citizens would help to make up for the imbalance of the previous 30 years.
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Due to their disproportionate receipt of government benefits, wealthier seniors will also inevitably have to make somewhat larger payments and accept slightly smaller benefits. It’s a common misconception among Medicare and Social Security beneficiaries that they have accumulated bank deposits to which they will be entitled in full upon retirement; however, this is not how these two systems operate. Rather, both schemes are primarily supported by current employees who pay for participants based on benefit schedules that were created a long time ago, often even when life expectancy was higher and retirement was substantially different.
Present Social Security and Medicare beneficiaries shouldn’t be upset because the majority receive higher benefits than they contribute. The average retiree of today will receive benefits worth roughly $238,000 with inflation adjustments, after paying roughly $176,000 in Social Security taxes. Medicare’s lifetime benefits, which are also inflation-adjusted, will come to $298,000 after lifetime taxes of roughly $48,000.
The fact that baby boomers are flooding into Medicare and Social Security and that there aren’t enough new hires to cover all payments due on schedule is contributing to the bleak prognosis for the federal budget. From 5.1 in 1960 to about 2.9, the ratio of workers to retirement recipients has decreased, and by 2030, it is expected to reach 2.5. Benefits for more retirees are being paid for by fewer workers, and both schemes will run out of money in the early 2030s.
One way to keep benefits intact might be to raise the payroll taxes that finance Social Security and Medicare or increase the ceiling on the Social Security tax, which currently applies only to the first $168,600 of income. However, this could undermine the original purpose of these programs, which were designed to prevent seniors from falling into poverty, not to enhance their lifestyles at the expense of younger Americans who are still building their families and careers.
Social Security and Medicare have traditionally worked by providing financial support and health coverage to vulnerable seniors. Meanwhile, today’s retirees have become the wealthiest demographic in American history, benefiting from the strong economy of the 1980s and 1990s, a significant increase in stock values, and a substantial rise in home values. Many retirees own their homes outright or have small mortgage payments, with substantial savings and no childcare expenses.
Not all seniors are wealthy, but overall, older Americans hold more wealth than any other age group. The average net worth of people between 65 and 74 is $1.8 million, the highest of any age group, according to the Federal Reserve. Those 75 and older have an average net worth of $1.6 million. The Wall Street Journal recently reported on the rapid growth of retirement towns in the South, where baby boomers enjoy life “like they’re at college, except they don’t have to go to class and they have $3 million in the bank.”
Social Security and Medicare are the nation’s most expensive social programs, yet their benefits go to America’s wealthiest demographic. Raising taxes to maintain these benefits at current levels would result in “the largest intergenerational wealth transfer in world history,” according to Riedl’s analysis for the Manhattan Institute.
Riedl suggests solutions that involve reasonable sacrifices from those who can afford it. His plan would keep Social Security and Medicare benefits fully intact for the bottom 40% of enrollees, by income, while making modest benefit cuts for the top 60% and gradually raising the Social Security retirement age from 67 to 69.
Additionally, there would be targeted tax hikes on businesses and the wealthy, including raising the top individual income tax rate, increasing inheritance taxes involving capital gains, and reducing some business tax breaks. Defense spending and other discretionary outlays that Congress must approve annually would also need to be capped or reduced.
Two changes would directly affect ordinary workers. One is a 1-point increase in the tax that funds Medicare, with workers and employers each paying half. The other is taxing part of employer-provided health benefits as income, which would effectively be a tax hike.
Most working taxpayers might find something in these proposals that would make them worse off. That’s the point: the nation’s massive debt load can’t be fixed without everyone making some sacrifices.
However, Riedl’s plan avoids certain measures. There’s no value-added tax, which is a national sales tax common in many wealthy nations, bringing in substantial revenue from consumers. There’s no significant business tax hike that could hurt U.S. competitiveness and encourage tax-sheltering. There’s no increase in the Social Security tax. There’s also no call to cut Medicaid or other parts of the social safety net that mainly benefit the poor.
Liberals might prefer more tax hikes and bigger defense cuts while leaving most social benefits intact. There are many options available. The Congressional Budget Office regularly lists ways to address the debt, including higher taxes on businesses and the wealthy and significant cutbacks in spending on defense, infrastructure, law enforcement, and other government functions.
However, every solution has trade-offs and unintended consequences. If tax hikes are too steep, they could harm economic growth, especially when the budget squeeze leaves little room for error. Cutting defense spending could backfire given the current global tensions, with conflicts in Eastern Europe and the Middle East and rising threats from Russia, Iran, North Korea, and possibly China.
So far, every partisan plan to address the national debt has failed because it appeals to one large group but is unacceptable to another. When politicians start proposing plans that nobody likes, they might finally be on the right track.