Entitlements

America's Coming Transfer of Wealth

How entitlement spending transfers wealth from the young to the old.

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Does it seem as if some lawmakers have the attention span of a toddler? Several years ago, concerns about the debt and overspending were all the rage. These worries have dissipated almost entirely as deficit levels have gone down from their sky-high summit in 2009. And just like that, lawmakers have gone back to overlooking our long-term fiscal situation and the unsustainable path the nation is on.

Case in point: the latest projections from the Congressional Budget Office. According to the CBO's annual Long-Term Budget Outlook, if current laws were to remain unchanged, government spending as a share of gross domestic product would reach 22.2 percent in fiscal 2025, up from 20.5 percent today. By then, even under a very rosy GDP growth scenario, the debt would amount to 78 percent of the economy. To put this number in perspective, the debt-to-GDP ratio was 35 percent in 2007. In 2040, the debt could reach a whopping 103 percent of GDP. Spending on interest alone would consume 4.3 percent of GDP, a dramatic increase above the current 1.3 percent. Putting that in dollar terms, interest on the debt would jump from $235 billion to over $2.2 trillion. That's a lot of money.

The deterioration comes fully from the explosion of major health care programs, Social Security and escalating interest on debt costs. More precisely, Medicare, Medicaid, Affordable Care Act subsidies, and Social Security are the drivers of our future debt. Spending on these programs alone could reach 11.8 percent of GDP in fiscal 2025 and 14.2 percent of GDP in 2040, up from 10.1 percent today.

Because spending on entitlements will continue to outpace all other spending for years to come, they will consume a large and increasing share of the budget. In layman's terms, it means that the future of our government will be mostly to spend money on older Americans for their retirement and health care. Despite federal revenues slightly increasing during the coming decade, the government could still run cumulative deficits of $7.4 trillion over that 10-year period, according to CBO forecasts.

Of course, all of the policy uncertainty in Washington, not to mention the CBO's required current law projections, will not yield perfectly accurate forecasts. If lawmakers were to make changes to current law—say, repeal the sequester cuts or scheduled tax increases or fail to implement some of the "savings" in the president's health care law—then deficits and debt would be significantly higher than the amounts reported under the current base line.

For example, under the alternative scenario, the CBO projects that debt would reach 86 percent of GDP in fiscal 2025, and spending would be 22.9 percent of GDP. In 2040, debt as a share of GDP would be an unimaginable 156 percent. And of course, the more debt you have the more interest you pay. Interest on the debt would equal 6.3 percent of GDP, or $3.2 trillion.

Now, if you are not freaked out enough, the CBO also looks at the negative impact on the economy of accumulating such levels of debt. In that scenario, higher debt means lower growth, and that increases our debt to 175 percent of GDP.

And who do you think is going to shoulder this lower growth and higher debt? The younger generations will. Without any changes to our enormous entitlement programs, we are about to witness the most massive transfer of wealth from the relatively poor and young to the relatively rich and old in society. It is time for members of Congress to stop acting like toddlers and refocus on changing the path we are on.

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  1. Progressive are hell bent on turning this country into Greece.

  2. The national debt is already over 100% of GDP. The problem is far worse than portrayed.

    1. At this point, the end result is baked in. Many other developed countries are in the same boat and year after year, the debt grows faster than the economy. Anything short of a global game changer in technology, and a lot of countries are heading for tragedy.

      1. If by technology you mean something than evaporated 53% of the population then you may be right.

        Otherwise technology is incapable of overcoming systemic corruption.

    2. It doesn’t count if we owe it to ourselves!

  3. I made a mistake in telling my grandfather that these programs take from people my age to prop up (literally and figuratively) the elderly after he lectured me on how kids my age aren’t as responsible and self-sufficient as the “greatest generation.”

    He didn’t have a moment of self-awareness or hypocrisy or irony after I made that point. He just looked irritated and mildly offended when he said “but I need it…”

    1. You voted for hope and now you’re left with change.

      1. I am totally using that.

  4. Social Security and Medicare are already transfer programs. You take money from someone and give it to someone else, which is why age demographics can screw it all up. Don’t expect people to realize those payroll taxes aren’t actually being invested like a personal account though.

  5. Spending on interest alone would consume 4.3 percent of GDP, a dramatic increase above the current 1.3 percent.

    I’m guessing this assumes yields on Treasurys remain historically low. That’s really not a given. The recent illiquidity in the bond markets and weird gyrations make even basic predictions difficult. Bond markets appear unstable – not a good thing for long term projections. The CBO assumptions about GDP are laughable also.

    Really, the only possibility of a return to any kind of fiscal or monetary restraint is another crisis forcing it on policy makers.

    1. The fed will take care of that.

  6. “And who do you think is going to shoulder this lower growth and higher debt? The younger generations will. Without any changes to our enormous entitlement programs, we are about to witness the most massive transfer of wealth from the relatively poor and young to the relatively rich and old in society. It is time for members of Congress to stop acting like toddlers and refocus on changing the path we are on.”

    As most in congress are old and rich, what’s their motivation to change it? They got theirs AND managed to set up a taxpayer funded annuity. In addition, they now have the ultimate in control with all the levers needed to steer us to the promised land. Of course, just because it’s promised doesn’t mean it’s good.

  7. Acting like toddlers? Na, they’re acting like greedy old men and women.

  8. OT: (mostly) What do you think happens when just about every job is automated? What effect would that have on free markets and capitalism? It sounds like what may play out is that a few industrialists own all the machines that produce everything, and since they only have to hire a small cadre of technicians and engineers to keep things running, there won’t be many jobs left. Even the robots will be manufactured by other robots. If the vast majority of the population is left unemployed, they won’t have any money to spend, so even if someone starts a business of some sort that is safe from automation, they won’t have very many customers. The result would seem to be the owners of the robots living the easy life while the rest of us dig for potatoes with our fingers in some barren field.

    This is just one permutation of the scenario that I was running through in my mind. Do you think it would play out differently? I’m just curious how libertarianism would react to this situation, and what the government should or (probably more importantly) should not do when it happens.

  9. “Coming transfer of wealth”? Social Security and Medicare have been intergenerational transfers of wealth from the very beginning. At this rate we might have to leave the Eurozone and create our own currency. Oh, wait…

  10. It is only fair that ghe younger generations pay for the profligate spending of the Democrats. After all, they brough America 8 years of Obama and they will probably bring America 8 years of Hillary. As they sow, so shall they reap. In the meanwhile, I am healthy, wealthy, and wiser than they.

  11. Not to worry. The Krauts will be around to bail us out, right?

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  13. Social Security and Medicare were paid into, for their entire working lives, by all those “old folks” you seem to think are cheating the young out of their money.
    Don’t blame those who have been expecting FEDGOV to live up to their promises if the money has been pissed down the rat hole that is the welfare system/vote-buying scheme, and not used for profit making so that the benefits could be paid without making it into a giant Ponzi scheme.

  14. Let’s not forget the government will still be spending a large sum of money in the future on questionable military campaigns. Let’s not sell our government short!

    1. And don’t forget planes that are overbudget and underperforming.

  15. Had the greedy hands of the politicians these past many years been stayed from raiding the Social Security “trust” fund and left it to build as was intended, there would be no looming shortage. (……………………………) (……………………………) (…………………………) (………………………)

    The Fed creates as much money (debt) as it wants to pass around to it’s co-conspirator bankster buddies, off book black budgets, foreign entities and “too big to fail” corporate thieves. In effect stealing future earnings from the rest of us. As for the promise that Social Security was supposed to be, they can just keep on printing up that money. And instead of the writers of articles such as this one, complaining about how much Social Security cost; Perhaps they should direct their outrage at the criminals benefiting from the theft of our blood and sweat by the list of rue criminals I mention above.

  16. As a retired elder, I will often thank workers, retail sales people and various young progressives for their contribution of over $30 K to my better-thatn-their lifestyle. Maybe they will get the point. Eventually helping to kill the entitlement programs keeping them “poor”. But! No ! They will want to get their share of the freebies. Technology doubles every 18 months as does idiotic thinking in our government. Laws on top of laws on top of laws. Am I really still paying a tax for the Spanish American War??

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  18. Social Security is an enormous transfer of wealth from young to old. Many Millennials understand that they will never be able to participate in this entitlement program. Some 60% believe that Social Security will be bankrupt before they receive benefits. It is disturbing that Millennials are forced to support Baby Boomers and “contribute” to a system that obviously will not support them when it is their turn to retire. I believe that every American deserves the chance to opt out of Social Security. If you feel the same way, please stop by http://takebackyoursixpercent.com look around and sign our petition to allow every American the choice to opt out of Social Security.

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