Once you start talking about trillions of dollars, it becomes difficult to visualize their real impact. And when you throw in the fact that the problem develops over time, it’s even more difficult to see how it affects you personally. But the key point is that if absolutely nothing was done and we let Medicare, Social Security and the national debt continue on their current track, by 2040 the federal government wouldn’t have money to do anything else but pay for entitlements and interest.
But the experts point out several all-too-real possibilities:
- Deep budget cuts. If maintaining entitlements take up all the money the government collects, than everything else has to go – or at least get cut way, way back. That means the “discretionary” spending that includes a lot of federal activity we really need, or at least would really miss. The national parks, for example, or student loans, medical research (see the budget pie for other possibilities).
- Benefit cuts. If we’re not willing to cut everything else, then we might have to cut benefits to seniors. Right now the Social Security Administration projects there will only be enough money to pay 73 percent of benefits; considering the potential problems with Medicare, seniors might be lucky to get that much.
- Higher interest rates for everybody. The more the government has to borrow, the less lending power there is for everybody else. And as the U.S. government’s financial position deteriorates, lenders are going to demand tougher terms and higher interest to lend the government money. That’s going to push interest rates up, too.
- Crippling tax rates. The Government Accountability Office projects that if nothing is done, by 2040 all the government’s tax revenue will be eaten up by interest on the debt plus some entitlement spending. Anything else the public wants to keep in the budget will require new taxes.
- Hyperinflation. Many countries with severe fiscal problems have had this problem, because there’s a great temptation to pay off national debts by printing more money. Inflation helps debtors (including governments) pay back what they owe – but it’s brutal for anyone trying to save or invest, because your savings will be eaten up by rising prices.
