Rising rates will collide with rising entitlement deficits
It’s no longer a secret: interest rates are going up, and when they do, the cost of borrowing for everyone will rise. That includes borrowing costs for the federal government, which, for the last few years, has piled on new debt in record amounts, little caring for how it would all get repaid.
Yeah. About that…those debt payments, at higher rates, are going to run right into a widening entitlement funding gap:
CBO estimates that escalating Social Security and Medicare shortfalls will bring $112 trillion in 30-year baseline deficits. Unlike interest rates, these long-term federal deficits can be reliably projected because they are based on Social Security and Medicare spending commitments that are already set in law.
Under this baseline scenario, the national debt will double from 100 percent to 202 percent of GDP over the next three decades. Annual budget deficits would gradually rise to 13.3 percent of GDP (compared to 3 or 4 percent of GDP in the recent pre-pandemic years). Interest payments would become the largest federal expenditure, consuming half of all tax revenues. And beyond that point, the debt would continue rising by 80 percent of GDP per decade.
This is just the CBO baseline scenario, which assumes peace, prosperity, the expiration of most of the 2017 tax cuts, and no additional spending expansions.
But what if interest rates exceed the CBO baseline by even one percentage point? That would add $30 trillion in interest costs over three decades — equal to the entire defense budget over that span. The debt would instead leap to 243 percent of GDP (and rising steeply), the annual budget deficit would jump to 17.6 percent of GDP, and interest payments would consume 70 percent of all tax revenues.
The longer we look the other way on how much money politicians borrow and spend, the more painful the future gets. Maybe not for us. But most certainly for those future generations who will have to pay for all the YOLO spending we are doing today.