In Brief

The U.S. federal government’s own financial reporting paints a picture of an “unsustainable fiscal path.” The projections from the Treasury Department and Government Accountability Office depict ever-increasing costs for future obligations under Social Security, Medicare, and Medicaid. Recent federal budget and tax bills have shrunk current tax collections. The sooner such long-term imbalances in revenue and spending are addressed, the more gradually tax increases or benefit reductions can be implemented, and the less interest will be incurred on borrowing in the interim. The authors illustrate the federal government’s precarious fiscal position and prescribe pragmatic remedies, warning that the longer officials wait to fix the problems, the worse it will get.


The United States is on an “unsustainable fiscal path,” according to the 2018 Financial Report of the U.S. Government (Department of the Treasury, produced by the U.S. Treasury. The U.S. Government Accountability Office (GAO) concurred in its report on “The Nation’s Fiscal Health” (GAO 2019, The Congressional Budget Office (CBO), which analyzes the federal deficit through the lens of the U.S. Gross Domestic Product (GDP), predicts that the debt-to-GDP ratio will exceed 100% of GDP within 20 years, a level that was only previously reached during World War II (GAO 2019). The major spending drivers along this path are Social Security, Medicare, and future interest payments.

The CBO projects that the 2019 U.S. budget deficit will be $960 billion and that the annual budget deficit from 2020 to 2029 will average $1.2 trillion under current federal budgetary laws (CBO 2019 Budget Outlook, As of the end of August 2019, the U.S. overall has a federal stated budget debt of nearly $22.5 trillion dollars (see Exhibit 1); this is materially understated when future obligations, such as Social Security, are fully accounted for. Reflecting this reality, U.S. Treasury Secretary Steven Mnuchin highlighted in the 2018 Financial Report that the federal government faces a “long-term fiscal challenge of funding Social Security, Medicare, and Medicaid programs.” The 2019 OASDI Trustees Report (OASDI19, observes that Social Security’s Old Age, Survivors, and Disability Insurance (OASDI) trust funds alone have a projected unfunded obligation of $43.2 trillion on an infinite horizon and present value basis.

Exhibit 1

Stated U.S. Federal Governmental Debt as of August 30, 2019

Debt Held by the Public; Intragovernmental Holdings; Total Public Debt Outstanding $16,596,815,590,260.74; $5,863,651,035,691.63; $22,460,466,625,952.37 Source:

This article analyzes the U.S. federal debt projections and their likely implications as projected in several U.S. government studies and reports. While these reports use different accounting methods (cash basis, accrual basis), time periods (calendar, fiscal year), time horizons (50 years, 75 years, indefinite), and at times different inputs in calculating projections, all these methods project the same unsustainable path.

Social Security and Medicare Trust Funds

The trust funds of Social Security and Medicare comprise U.S. government debt and thus are not truly independent funds separate from the U.S. government; in fact, in each year’s U.S. Financial Statements, these funds cancel each other out in consolidation. The Social Security and Medicare Board of Trustees 2019 Summary of its Annual Report (SMTA19, observed that 45% of all federal expenditures were disbursed on Social Security and Medicare payments in fiscal year 2018. SMTA19 stated that the Social Security “combined trust funds will be depleted in 2035” (OASDI is technically two funds).

The trustees currently project that Social Security revenue will cover only 80% of scheduled benefits in 2035. Social Security and Medicare laws, as now codified, generally require that benefits can only be paid up to available balances in the trust funds. Thus, without legislative changes, at some point in the future some benefits will go unpaid. SMTA19 concludes:

Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.

The sooner reforms are enacted, the greater the mitigation of the consequences; the later reforms are enacted, the greater the negative impact will be.

Exhibit 2 shows the material costs of delaying the needed reforms from 2009 to 2019 in terms of increased Social Security tax rates or benefit reductions. For $100 in W-2 wages, Social Security taxes would need to go from $12.40 to $15.10 in order to place Social Security on a stabilized path. If this had occurred in 2009, the new rate would have been $14.40.

Exhibit 2

Growing Costs of Inaction on Social Security

Stabilization Measures under Intermediate Assumptions Year; Actual SS Payroll Tax; Rate Increase; Benefit Reduction 2009; 12.4%; 14.4%; 13.3% 2019; 12.4%; 15.1%; 17.0% Cost of Inaction; +0.7%; +3.7% Source: 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, p. 19; 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, p. 4.

As the 1983 bipartisan agreement reached between President Ronald Reagan and House Speaker Thomas O’Neill (DMA) proved, compromises that stabilize the long-term outlooks of these programs are possible. Unmistakably, reforms will be hard fought, as politicians are reluctant to modify the present structures so as not to upset their constituents. As the late senator Daniel Patrick Moynihan (D-NY) often commented, “Social Security is easy; it’s just difficult.” (Charles Blahous, “We’re Running out of Time. Social Security Must Be Saved Now,” Washington Post, Apr. 26, 2019, The sooner reforms are enacted, the greater the mitigation of the consequences; the later reforms are enacted, the greater the negative impact will be.

Politics of Social Security

Paying Social Security taxes for future benefits is questioned by a vast majority of Americans in polling data from the Pew Research Center and Gallup. In 2019, it was reported that 83% of nonretirees stated they would receive reduced benefits (Kim Parker, Rich Morin, and Juliana Menasce Horowitz, “Looking to the Future, Public Sees an America in Decline on Many Fronts,” Pew Research Center, Mar. 21, 2019,; however, 74% of Americans supported not cutting Social Security in any manner (“Polling Memo: Americans’ Views on Social Security,” Social Security Works, March 2019, Current Social Security recipients are highly dependent on these benefits, since nearly 57% of retirees identify Social Security as a major source of their income (Megan Brenan, “More Nonretired Americans Expect Comfortable Retirement,” Gallup, June 18, 2019,

In January 2019, John B. Larson (D-CT), Chairman of the House Ways and Means Committee, introduced “The Social Security 2100 Act” with the support of over 200 Democratic members of the House, legislation that would increase Social Security benefits and taxes. This bill would expand Social Security for the first time since 1972; the proposal would phase in an increase in the Social Security tax to 14.8% (currently 12.4%) and would reimpose this rate on earnings over $400,000. Currently, the Social Security tax is highly regressive, as it ceases to apply once earnings exceed $132,900. The legislation has been promoted as bringing Social Security into “sustainable solvency” (Robert Pear, “Democrats Push Plan to Increase Social Security Benefits and Solvency,” New York Times, Feb. 3, 2019,

Republican proposals have tended to increase the retirement age and decrease cost of living adjustments. Representative Kevin Brady (R-TX), the leading Republican on Ways and Means, posts on his website that he is for an “aggressive reform agenda,” while opposing legislation that would cut benefits to current beneficiaries (“Retirement Security,” President Trump, during his candidacy, stated, “I’m not going to cut Social Security like every other Republican,” although his administration has since proposed cuts to Social Security’s disability benefits (Pear 2013).

Bipartisan Budget Act of 2019

In August 2019, Congress passed the Bipartisan Budget Act of 2019, which contained a two-year budget deal that averted another government shutdown and suspends the debt limit until July 2021. From a budgetary perspective, the act did nothing to address the growing national debt, as the projected U.S. cumulative deficit will increase another $809 billion from 2020 to 2029 (CBO 2019 Budget Outlook). The bill passed with approximately two-thirds of the House of Representatives supporting it. In the Senate, 67 senators voted for the bill, with 23 Republicans and 5 Democrats voting against it (Andrew Duehren, “Senate Passes Two-Year Spending Deal That Suspends Debt Ceiling,” Wall Street Journal, Aug. 1, 2019,

While a two-year budget deal and debt suspension is helpful according to some viewpoints, it defers the day of reckoning for the unsustainable U.S. federal budget path and makes the problem nearly $1 trillion worse. Each time the federal debt limit is exceeded and the U.S. Treasury takes “extraordinary actions” to keep the government running, it carries major risks. The debt limit is now suspended until after the 2020 election. Hopefully, this issue will at least become a vigorous component of the public debate during the upcoming election campaign.

Prior to the Bipartisan Budget Act of 2019, the federal government was once again exceeding the federal debt limit (as of March 1, 2019). For years, the continued inability to timely increase the debt ceiling has disrupted Treasury markets, and this could easily increase future borrowing costs. As Treasury securities “play a vital role to financial markets” and the “full faith and credit of the U.S. must be preserved,” Congress needs to address this chronic problem to place the federal government on a “sustainable fiscal path” (GAO 2019).

Composition of U.S. Debt

Intragovernmental debt is nearly $6 trillion, the majority of which is represented by Social Security and Medicare. Over time, when Social Security and Medicare revenues exceeded expenditures, funds were deposited into Treasury accounts. Technically, the Treasury issued Government Account Series (GAS) debt at those times. The GAO describes this unique debt as both an asset and a liability that cancel each other out in the U.S. Financial Statements. More specifically, the GAO 2019 report states:

Intragovernmental debt is debt owed by Treasury to another part of the government. It is an asset to the federal government accounts but a liability to Treasury; they offset each other in the consolidated financial statements. However, when securities from intragovernmental debt are redeemed, the federal government will need to obtain the resources to reimburse the government accounts, which could lead to increased debt held by the public.

While a two-year budget deal and debt suspension is helpful according to some viewpoints, it defers the day of reckoning for the unsustainable U.S. federal budget path and makes the problem nearly $1 trillion worse.

These internal IOUs will have to be dealt with eventually. As of the end of 2018, U.S. investors (domestic investors, the Federal Reserve, state and local governments) owned approximately 60% of the nearly $16 trillion U.S. public debt, and foreign investors owned 40%.

Untenable Forecasts

Long-term projections reveal the untenable nature of current policies, which are highlighted in Exhibit 3. The Medicare Trust Fund is projected to be depleted as early as 2026, at which time Medicare tax revenue will cover only 91% of its claims. Sooner or later, the fiscal realities of Social Security, Medicare, and the associated interest costs will force changes.

Exhibit 3

GAO Fiscal Unsustainability Projections

Year; Milestone 2019; Social Security annual spending exceeds $1 trillion 2025; Pension Benefits Guaranty Corp. will be depleted 2026; Medicare Trust Fund will be depleted; Medicare spending will exceed $1 trillion (can pay 91% of costs) 2030; Annual federal interest will exceed $1 trillion 2031; 2018 Financial Reports predict debt-to-GDP ratio will exceed 106% (its historical high) 2034; Social Security Trust Fund will be depleted (can pay 77% of benefits) Source: GAO 2019 Fiscal Health

Pragmatically, the United States currently is in a position of relative strength to implement the almost inevitable “significant changes to tax and spending policies.”

On its current path, the federal government will continue to incur increasing annual deficits that will carry material risks and limit options when a resolution is eventually forced upon the nation. As the CBO 2019 Budget Outlook observed:

That debt path would also pose significant risks to the fiscal and economic outlook, although those risks are not currently apparent in financial markets. In particular, the significant increase in federal borrowing would elevate the risk of a fiscal crisis and would limit lawmakers’ ability to adopt deficit-financed fiscal policies to respond to unforeseen events or for other purposes.

Without changes, U.S. fiscal policy is unsustainable. The longer it takes to make the needed changes, the more costly they will be, and the more limited the options. There are significant risks that projected costs could be materially higher due to future economic crises, recessions, or other fiscal events. Pragmatically, the United States currently is in a position of relative strength to implement the almost inevitable “significant changes to tax and spending policies.”

Under the GAO’s alternative simulations for 2048, spending on major healthcare programs is projected at $3.2 trillion (compared to $1.1 trillion in 2018), and net interest spending is projected to be $2.5 trillion (compared to $325 billion in 2018), all in 2018 dollars. Under the GAO’s alternative simulation, the key drivers of increased federal GDP spending are healthcare and net interest payments, as shown in Exhibit 4.

Exhibit 4

Drivers of Debt to GDP

% of GDP 2018; 2048 Federal spending on healthcare; 5.4%; 8.6% Net interest payments; 1.6%; 6.7% Source: GAO 2019 Fiscal Health, pp. 23 and 26

These projections reveal that federal spending on healthcare (a major component of which is Medicare) will grow to nearly 10% of GDP by 2048. According to the GAO, recently enacted legislation is expected to add nearly $2.7 trillion to the federal deficit from 2018 to 2027, mainly from the Tax Cuts and Jobs Act of 2017 (TCJA), the Bipartisan Budget Act of 2018, and the Consolidated Appropriations Act 2018; the Bipartisan Budget Act of 2019 only adds to these projected deficits. The GAO predicts that in order to close the fiscal gap, policymakers will need to increase revenue, decrease spending, or “more likely, do both.”

U.S. 2018 Financials

The GAO annually audits financial statements of the U.S. government, which are produced by the Treasury Department in coordination with Office of Management and Budget (OMB). Regarding the 2018 U.S. financial statements), the GAO concluded:

We were unable to provide an audit opinion on the federal government’s fiscal year 2018 consolidated financial statements due to material weaknesses in internal control and uncertainties concerning the sustainability of financial statements (GAO 2019).

The GAO also found significant deficiencies in the areas of taxes receivable, federal grants management, and Medicare social insurance information.

The U.S. 2018 Financials amounts differ from the annual budget amounts due to the financial report generally utilizing “accrual and modified cash basis accounting” (i.e., costs incurred but not paid and revenue earned but not necessarily received are recognized), whereas the U.S. annual budget uses the cash basis. The highlights of the U.S. 2018 Financials, and some of their implications, include the following:

  • The federal government net cost was $4.5 trillion in 2018.
  • Net operating cost (the extent costs exceed revenues) was $1.2 trillion. (This is higher than the stated cash budget deficit of $779 billion, due to recognizing accrued costs.)
  • Interest costs were $357 billion ($296 billion in 2017). As discussed below, the United States is currently borrowing at very low interest rates, but this cannot be counted on to last and is being more than offset by increasing spending.
  • U.S. assets were calculated at $3.8 trillion, of which student debt was $1.4 trillion. Current proposals by Democratic presidential candidates to forgive student debts would have serious budgetary implications.
  • Assets not accounted for included national parks, natural resources, and the government’s ability to tax and set monetary policy.
  • U.S. liabilities were calculated at $25.4 trillion (not counting $5.8 trillion of intragovernmental debt).
  • Social Security in 2018 had 62 million beneficiaries. With a 2019 U.S. population of approximately 327 million, this means that 18% of the U.S. population receives some form of Social Security benefits. With declining birth rates, this percentage will grow in the future; the Social Security Administration projects that 78 million Americans will be over 65 in 2035 (Fact Sheet: Social Security,
  • The net federal tax gap was estimated at approximately “$458.0 billion for the Tax Years 2008–2010.” Clearly, better enforcement and tax simplification would aid in this area. While the TCJA increased the number of taxpayers utilizing the standard deduction, it also added the highly complex qualified business income deduction. It is now projected that less than 14% of all taxpayers will itemize in 2019 (Scott Eastman, “How Many Taxpayers Itemize under Current Law?” Tax Foundation, Sept. 12, 2019,
  • In 2018, $151 billion in improper payments were made. This is another area of potential material improvement, according to the GAO, with many of the highest-risk U.S. agencies not even being able to make an estimate.

Better enforcement of the tax code would have significant revenue implications. A comparison of the $458 billion tax gap to the 2018 fiscal year cash budget deficit of $779 billion shows the benefits of better tax enforcement. The tax gap is caused by taxpayers underreporting, underpaying, and failing to file. As the GAO observes, “even modest reductions” in the gap would yield significant benefits. On the negative side, student debt is listed as a $1.4 trillion asset, even though the full collectability of these loans is considered problematic.

The U.S. 2018 Financial Report uses fiscal projections based on present values of future cash flows (cash basis) and assumes the continuance of current policy. For example, while the Budget Control Act of 2011 contains caps on discretionary spending, “these caps have been raised repeatedly.” As of 2018, discretionary spending is now assumed to grow at the nominal GDP rate (GAO 2019).

The CBO revised its future projected interest rates down in August 2019 in its 2019–2029 Budget and Economic Outlook; it now projects 10-year Treasury Notes will yield 3% in 2023. While this saves $1.1 trillion over 10 years, the debt-servicing cost will still increase by $300 million (primarily due to increased spending in the Bipartisan Budget Act of 2019). The U.S. 2018 financials assume an average interest rate of 5% in 2048 (the same as the 2018 Social Security Trustees Report), whereas the GAO 2019 report projects a 4.4% rate.

The tax gap is caused by taxpayers underreporting, underpaying, and failing to file. As the GAO observes, “even modest reductions” in the gap would yield significant benefits.

While interest rates are historically low, as evidenced by the 10-year U.S. Treasury closing yield of 1.47% in the beginning of September 2019, this cannot be counted on to last. The lowest yield on 10-year U.S. Treasury Notes occurred in 2016, when the rates fell to 1.366% (Matt Wirz, “Technical Bid Pushes U.S. Treasury Yields Close to Record Low,” Wall Street Journal, Aug. 28, 2019, What happens if interest rates spike due to a fiscal crisis or the market demands higher rates due to increasing federal debt burdens? By 2022, approximately 61% of Treasury securities held by the public will mature, to the tune of $9.2 trillion.

Long-Term Projections

While some will argue that long-term projections are inherently unreliable, the fact remains that the GAO, CBO, Social Security, and Medicare have run various alternative simulations that all reveal long-term fiscal debt distress of material proportions. The GAO conducts sensitivity analyses where key variables are adjusted higher and lower. Scenarios include expected Medicare cost savings not being achieved and whether the TCJA is or is not extended (or certain provisions are retained, like the income and estate tax provisions). As “The Nation’s Fiscal Health” observes:

Overall, the 2018 Financial Report, CBO, and GAO each use somewhat different assumptions in their long-term fiscal projections, but their overall conclusions are the same: absent policy changes, the federal government’s fiscal path is unsustainable.

The GAO observes that current and future fiscal projections are based on laws passed by Congress and signed by the President. Currently, annual deficits of $1 trillion are projected as early as 2019/2020 without changes in fiscal policies.

While the various government agencies’ numbers vary, the magnitude of the ballpark number is of critical importance. For example, the GAO estimates net interest spending at $325 billion in 2018 (cash basis), whereas the 2018 Financial Report estimates interest costs to the public at $357 billion (accrual basis). While this is a difference of 10%, both interest amounts are over $300 billion. As noted earlier, the GAO 2019 report sees ballooning future cost drivers as follows (in its alternative simulations):

  • $3.2 trillion in major healthcare programs in 2048 (currently $1.1 trillion)
  • $2.5 trillion in interest cost in 2048 (currently $325 billion).

The various solutions to stabilizing the U.S. fiscal path are well documented and will almost inevitably be a product of a hard-fought political compromise.

Medicare, Social Security, and net interest will drive approximately 75% of the net increase in total spending over the next 10 years. U.S. interest cost is the fastest growing portion of the federal budget; both the GAO report and the U.S. 2018 financials predict the percentage of government spending on net interest will keep growing until it becomes the largest government outlay, with the GAO projecting 40% in 2092. These increases are expected as a result of both growing debt and expected increases in interest rates.

Additional Fiscal Risks

Healthcare and future interest costs are by no means the only threats to fiscal sustainability. Other major risks identified in “The Nation’s Fiscal Health” include the following:

  • The U.S. budget outlooks assume disaster spending based on the most recent year, but this is unrealistic. In 2018, $2 billion was spent on emergencies, as compared to $108 billion in 2017. Since 2005, nearly $430 billion has been spent on natural disasters; however, future climate change impacts are not accounted for by the OMB.
  • Housing markets are still federally supported. The Government National Mortgage Association (Ginnie Mae) insures nearly $2 trillion in housing-related securities.
  • Pension Benefit Guaranty Corporation liabilities exceeded benefits by $51 billion in 2018. Exposure to future potential liabilities is estimated at $185 billion. There is a 90% probability that the multiemployer program will be insolvent by 2025.
  • The United States Postal Service had a net loss of $3.9 billion in 2018. As of 2018, it had missed $48.2 billion in required retirement payments. This is mainly due to the USPS’s obligation to prefund all pensions up to 2056, required under the Postal Accountability and Enhancement Act of 2006.
  • Military operations in Iraq and Afghanistan continue to be a major budget issue; approximately $1.8 trillion has been spent since 2001.
  • The national surface transportation system is “under growing strain,” and it is estimated the cost will be “hundreds of billions to repair and upgrade.”

While not directly addressed above, the risks of quantitative easing are significant and unknown. From 2008 to 2017, the Federal Reserve purchased trillions in mortgage-backed securities and longer-dated Treasuries; as of March 2019, this portfolio was valued at $4 trillion (Nick Timiraos, “Fed Faces Crucial Decision on Mix of Treasurys in Its Portfolio,” Wall Street Journal, Mar. 19, 2019, One must wonder whether quantitative easing will ever end and what the negative implications will be when the next fiscal crisis or market crash inevitably occurs.

Pragmatic Reforms

Social Security and Medicare make up an ever-increasing share of annual federal expenditures; in fiscal year 2018, they comprised 45% of all federal expenditures, compared with 36% in 2011 (SMTA19). In the authors’ opinion, any pragmatic, bipartisan solution should include several of the following proposed reforms from 1983:

  • Constraining benefit increases (i.e., annual cost of living adjustments)
  • Adjusting age eligibility (currently 62 for partial benefits)
  • Increasing Social Security and Medicare revenues (i.e., increasing tax rates and the Social Security income cap, $132,900 in 2019)
  • Tightening up eligibility provisions and means testing.

While exact future costs and revenues are unknown, the projections from SMTA19 are based on the Social Security trustees’ intermediate assumptions. Specifically, the Nation’s Fiscal Health states:

Because the future is uncertain, the Trustees use three sets of assumptions to show a range of possible outcomes. The Trustees’ intermediate assumptions represent the Trustees’ best estimate of the trust funds’ future financial outlook. The Trustees also present estimates using low- and high-cost sets of assumptions.

Implementing reforms in Social Security and Medicare is far from easy. In the 1990s and 2000s, Presidents Bill Clinton and George W. Bush proposed reforms to Social Security and Medicare with little or no success. It is also worth remembering that the major driver of Social Security insolvency is not beneficiaries living longer, but rather a decrease in family birth rates, now approximately two children per family as opposed to over three from 1946 to 1965 (Social Security Bulletin, Nov. 3, 2010, p. 124). This trend has continued, as the National Center for Health Statistics reported in 2019 that U.S. birth rates have fallen to a 32-year low (Anthony DeBarros and Janet Adamy, “U.S. Births Fall to Lowest Level Since 1980s,” Wall Street Journal, May 15, 2019, Lower birth rates (absent offsetting immigration) lead to a smaller cohort of working age taxpayers relative to a larger cohort of retirees receiving benefits.

Pragmatic Realities

Given the fiscal picture painted by the federal government’s projections, the authors believe that it is time for tax increases or benefit reductions in Social Security and Medicare to place these critical social programs on a sustainable basis and put the nation’s fiscal path on a better trajectory. These programs, along with growing interest costs, account for nearly 75% of the projected increase in spending in the next 10 years. The various solutions to stabilizing the U.S. fiscal path are well documented and will almost inevitably be a product of a hard-fought political compromise. Delay will mean greater tax rate increases or spending cuts. The costs just to place Social Security on a sustainable basis are materially increasing; a Social Security tax rate of 15.1% or a benefit reduction of 17% is now needed, as opposed to 14.4% and 13.3%, respectively, in 2009 (see Exhibit 2).

The reality is that mandatory spending is currently consuming approximately 50% of the U.S. federal budget, and any realistic plan to address the nation’s fiscal path must address this fact head on. A combination of tax rate increases and benefit reforms is forthcoming for Social Security and Medicare, one way or another. The sooner this occurs, the less costly it will be for the U.S. economy and social fabric. It is high time that this truth is publicly recognized and aggressively dealt with; delay only limits the options available.

William M. VanDenburgh, PhD is an associate professor of accounting at the College of Charleston.
Philip J. Harmelink, PhD, CPA is the Ernst & Young professor of accounting at the University of New Orleans.
Roxane M. DeLaurell, JD, LLM, PhD is a professor of business law at the College of Charleston.