Owe, Susannah: How much the national debt will make you cry

Policy Review, Winter 1994 by Hewitt, Paul S

Two monster tax increases in 1990 and 1993 were imposed on American families in the name of deficit reduction. The medicine didn't work.

America's national debt is still spiralling out of control. At the beginning of fiscal 1994, the gross national debt stood at $4.4 trillion, with projections that it will grow by another $311 billion this year. Net national debt--taking out money the federal government owes to itself, such as the Social Security trust fund--stands at $3.3 trillion.

Congress, whose most important responsibility is to control taxing and spending, isn't even close to controlling the federal government's structural deficits. The projected deficit for FY 1994 is $253 billion, rising to $359 billion for FY 2000. That's not even counting the additional budgetary costs of the Clinton health plan, which economists such as Martin Feldstein of Harvard University have estimated could increase deficits by as much as $120 billion a year.

CASH YOU COULD HAVE USED

What does this mean for you? Last year the average American household paid $1,700 in taxes to finance interest on the national debt--another $450 was financed by borrowing. It was money you needed. A 25-year-old who saves $1,700 every year, earning 6 percent interest, can amass savings of over $263,000 by age 65. Alternatively, you might have used this cash for Christmas gifts, charitable donations, or to help with your college bills. It is the vacation you wanted to take, the boat you wanted to buy, the suits you wanted to replace but couldn't.

These subtractions from your paycheck are going to get larger. Net interest on the national debt amounted to $198 billion last year, making it the third largest program in the budget--after Social Security and defense. This is more than the combined budgets of the Departments of Commerce, Education, Labor, State, and Transportation, plus NASA and the Environmental Protection Agency. Interest costs are expected to grow 65 percent over the next 10 years, again not counting the Clinton health plan. Unless you expect your income to rise by more than 65 percent over the same period, you will have to pay a higher proportion of your earnings to finance Washington's debt binge.

But you' re caught in a Catch-22, because skyrocketing deficits make it harder to finance the investment we need to raise long-term living standards. Federal borrowing as a share of net private savings soared from a mere one percent in the early 1960s to a whopping 71 percent during 1991-92. As a result, America has the lowest savings rate in the industrialized world and depends on foreign savers for its net investment. That may have been all right in the 1980s when Japanese and German pension funds had surplus cash to invest here. But those days are over; where are we going to get capital now?

$900 BILLION MORE

President Clinton and the media like to blame our debt problems on the Reagan and Bush administrations. The national debt did grow by $2.6 trillion from 1981 through 1993--a threefold expansion over the $709 billion accumulated in the country's first 201 years. Half of the debt before 1980 was incurred to fight World War II, and about a third of the new debt in the Reagan-Bush years financed the military buildup that won the Cold War. The remaining new debt would have been lower if most of President Reagan's proposed domestic spending cuts hadn't been pronounced "dead on arrival" in the Congress. Whatever the reasons, each household's share of the national debt has grown by $28,500 since 1980, each individual's by $10,400.

Meanwhile, over the next five years, the Clinton administration plans to increase the national debt by another $1.12 trillion--or about $12,100 per household. Again that's not counting the cost of the health plan. It also assumes that long-term interest rates stay low. Should interest rates return to the levels just five years ago--a possible response to simultaneous economic recoveries in Japan and Western Europe, or simply a resurgence of inflation--annual debt service costs could rise by another $70 billion, or $760 per household.

There is one overriding reason for the explosion of the national debt, and that is the skyrocketing of payments for the elderly. Over the next decade, the Congressional Budget Office (CBO) forecasts that annual federal spending will grow by roughly $900 billion. This will require an additional $8,700 in tax revenues and deficit spending per household by year 2003. Ninety-two percent of this growth is accounted for by entitlement programs and interest payments on the publicly held debt. Social Security, Medicare, Medicaid payments to the elderly, and federal pensions account for 60 percent.

Indeed, because most federal social spending is on retirees, pressure on taxes and deficits is tied closely to the number of Americans in old age. The elderly population will explode when the enormous baby boom cohort reaches the age of entitlement in 2007. That's when the real debt crisis begins.

During the second decade of the next century, spending on the elderly under current law is projected to grow by $150 billion to $200 billion per year in 1992 dollars. By 2030, according to government estimates by the trustees of the Social Security and Medicare systems, the combined cost of Social Security and Medicare (Parts A and B), will equal 48 percent of payroll, assuming output per worker grows as fast as it did in the 1980s.