Debt Threat: The National Debt and You

The U.S. national debt is at post-war record highs, both in dollars and as a  share of the economy. And not only has it grown from 35 percent of GDP in 2007—about the post-war average—to 78 percent today, it is projected to exceed the entire economy in 12 years or less.

Ever-growing levels of debt threaten citizens’ and families’ economic well-being in a number of ways. A large debt:

• Hurts wages and jobs
• Makes borrowing more expensive for important investments
• Harms our children
• Threatens the safety net
• Risks a real crisis
• Prevents us from growing the economy

Growing national debt can drive up interest rates throughout the economy, leading to higher interest payments on mortgages, car loans, student loans, and credit card debt.

Although rates are currently low – due mainly to the weak economy and temporary efforts by the Federal Reserve to keep them down – they will most certainly rise as the economy recovers, and they will rise much higher if debt continues to grow.

Reducing the debt will help lower costs for middle-class families. Growing debt levels, on the other hand, will increase interest costs, squeeze family budgets, and put important family investments out of reach. In 30 years, interest rates would be about three-quarters of a point higher because of debt.[2] Put another way, a family with a $300,000 mortgage can expect to pay at least $45,000 more over the course of the mortgage.

Growing national debt means that the government must pay higher interest payments to service that debt. Interest will represent the fastest growing part of the federal budget. The nonpartisan Congressional Budget Office projects interest costs will nearly triple from $325 billion in 2018 to $928 billion in 2029. By 2031, 100 percent of the revenue we collect will go toward interest payments and mandatory spending. That leaves little room for important priorities and investments such as national defense, education, infrastructure, low-income support, and basic research. As more of our budget goes to financing today’s spending  and yesterday’s promises, spending targeted toward the next generation will continue to dwindle. 

The trustees who oversee Social Security and Medicare estimate both are on a road to insolvency. Social Security’s Disability Insurance trust fund will become exhausted in 2052, and Medicare’s Hospital Insurance trust fund will be exhausted in 2026. By 2035, the combined Social Security trust funds are expected to run out of money, at which point all beneficiaries – regardless of age, income, or ability to work – will receive an immediate 20 percent cut in benefits. For a typical 40-year old today, failure to act will mean more than $120,000 in reduced  lifetime Social Security benefits, in today’s dollars.[3] 

Failure to get the national debt under control could precipitate a crisis where investors are no longer willing to loan money to the government at affordable rates. Although no one knows when such a crisis would come and exactly what it would look like, international examples suggest there could be large investment losses, tanking markets, sharply rising interest rates, mass unemployment, rapid inflation, and/or devastating austerity causing sharp drops in public investment. 

Deficit reduction legislation presents an opportunity to enact pro-growth tax reform, improve government programs to reward work and savings, re-orient spending to important investments, and capture the economic benefits of putting the debt on a sustainable path. The Congressional Budget Office estimates debt reduction alone could increase the size of the economy by nearly 6 percent by 2047.[4] Tax reform has the potential to generate up to another 3.5 percent over the long run, and a few modest entitlement reforms could add an additional 2 percent by 2035.[5] Putting in place a credible, smart plan now would allow us to implement changes gradually in a way that actually accelerates the recovery through increased certainty and confidence. A comprehensive debt plan represents the best opportunity to enhance long-term economic growth. 

[1] Debt on a “downward path” is measured by enough savings to bring debt down to its historical average over 30 years, as opposed to staying on the current path. Figures based on per-capita GNP, a measure of the country's income divided by the country's population.

[2] CBO, “2016 Long-Term Budget Outlook.”

[3] Calculated using Census and SSA data for the average wage, life expectancy, and benefit payment. See How Old Will You Be When Social Security's Funds Run Out? for your age.

[4] “The Deficit Reductions Necessary to Meet Various Targets for Federal Debt,” August 2018.  

[5] Tax reform: Joint Committee on Taxation; Entitlement reform: CRFB

No matter what your ideology or political affiliation, there are good reasons to fix the debt. Here are four reasons why fixing the debt should be a priority for Democrats. 

No matter your ideology or political affiliation, there are good reasons to fix the debt.  Here are four reasons why fixing the debt should be a priority for Republicans.