top of page
Writer's pictureJames Heinz

Addressing the US National Debt Dilemma: Potential Solutions

As of 2024, the U.S. National Debt has surged to $34.6 trillion, driven by years of budget deficits, pandemic-related spending, and rising costs in key federal programs like Social Security and Medicare. 


The U.S. debt-to-GDP ratio, which measures the debt relative to the size of the economy, stands at 124%, indicating that the nation’s debt exceeds its entire annual economic output.

This poses significant challenges for fiscal sustainability.


Interest payments alone are a growing burden, with the U.S. government paying over $522 billion in interest on its debt in early 2024. The debt is projected to increase further, with estimates suggesting that the debt-to-GDP ratio could reach 200% by 2025 if no major fiscal reforms are implemented. 


In this article, we shall explore the potential solutions for the US National Debt Dilemma by stabilizing debt at 100% of GDP by 2034, reforming the tax code, and addressing Medicare and Medicaid spending.


Historical Comparisons of National Debt Levels


The U.S. national debt has grown significantly over time. In the 1980s, the debt was around $1 trillion, while by the early 2000s, it reached nearly $6 trillion. By 2024, the national debt is over $34.6 trillion


This represents a more than 10-fold increase in just a few decades. Historically, debt spikes have occurred during major crises, such as World War II, the 2008 financial crisis, and the COVID-19 pandemic, which all led to large increases in government spending to stabilize the economy.


Impact of Federal Budget Deficits


According to the USA Facts,  Federal budget deficits occur when the government's annual spending exceeds its revenue. The U.S. has consistently run budget deficits since 2001, meaning that each year, more debt is added. 


In 2023, the budget deficit was around $2 trillion, and for 2024, it remains similarly elevated. Deficits have been exacerbated by increased spending on social programs, defense, and stimulus measures, as well as revenue shortfalls due to tax cuts and slower economic growth​.


Role of Major Debt Drivers: Social Security, Medicare, Medicaid


Social Security, Medicare, and Medicaid are among the largest federal programs and key drivers of the national debt. As the population ages, the costs of these entitlement programs have surged. The government’s obligation to fund Social Security and healthcare programs for retirees has grown as the baby boomer generation reaches retirement age. 

These programs accounted for nearly half of all federal spending in 2023. Without reforms, their costs will continue to balloon, significantly adding to the debt.


Projections by the Congressional Budget Office (CBO)


The Congressional Budget Office (CBO) projects that if current policies remain unchanged, the debt-to-GDP ratio could exceed 200% by 2050. By 2034, projections suggest the debt will still be well over 100% of GDP unless significant fiscal reforms are implemented. These projections underscore the urgency of addressing long-term budgetary issues, especially in the face of rising costs for entitlement programs and interest payments.


This situation requires a combination of reducing deficits, reforming entitlement programs, and adjusting tax policies to stabilize the national debt and ensure economic sustainability.

Addressing fiscal stability involves immediate actions and strategic planning. While short-term measures are crucial, focusing on medium-term and long-term goals is essential for sustainable debt reduction and economic health, ensuring the government can manage fiscal pressures effectively over time.


What are Medium-Term and Long-Term Goals?  


Medium-term and long-term goals for U.S. National debt refer to fiscal targets that the government sets to manage and reduce the burden of its accumulated debt over specific time horizons. 


These goals are important for ensuring the country’s financial stability and avoiding the negative consequences of excessive debt, such as higher interest rates, reduced investment, and potential economic crises.


Medium-Term Goals

Medium-term goals typically cover a period of 10 to 15 years. For example, the goal of stabilizing the U.S. national debt at 100% of GDP by 2034 is a medium-term target. This goal implies that policymakers aim to prevent the debt from growing significantly relative to the size of the economy. 


Stabilizing the debt at this level would involve reducing annual deficits, ensuring that economic growth keeps pace with debt accumulation, and implementing fiscal measures that balance spending with revenue over the next decade or so.


Long-Term Goals

Long-term goals extend beyond the medium-term horizon and cover periods of 25 to 30 years or more. The goal of reducing the debt to 60% of GDP by 2050 is an example of a long-term objective. This would require sustained fiscal discipline over decades, including cutting deficits, reforming major expenditure programs like Social Security and Medicare, and perhaps increasing taxes or finding new sources of revenue. 

The long-term target of 60% of GDP is seen as a sustainable debt level that reduces the risk of economic instability while allowing the government to borrow affordably for future needs.


Medium-Term and Long-Term Goals for U.S. National Debt

  1. Stabilizing Debt at 100% of GDP by 2034: This medium-term goal requires slowing debt growth through deficit reduction, entitlement reforms, tax policy adjustments, and discretionary spending controls to prevent economic instability caused by excessive borrowing​​.

  2. Reducing Debt to 60% of GDP by 2050: Achieving this long-term goal involves aggressive fiscal reforms, significant cuts to entitlement spending, tax reforms, and sustained bipartisan commitment to lower deficits over time​​.

  3. Importance of Fiscal Goals and Metrics: Setting clear fiscal goals like reducing the debt-to-GDP ratio helps maintain economic stability by managing borrowing costs and fostering confidence in government debt, ensuring long-term prosperity.


Policy Proposals for Debt Reduction

  1. Raising Revenue: Increasing government revenue can be achieved through various means, such as raising taxes on high-income earners, closing tax loopholes, or implementing new taxes (e.g., carbon taxes). This approach helps reduce the deficit without necessarily cutting vital services​.

  2. Reducing Federal Spending: This involves cutting or reforming major expenditure programs, such as entitlement programs like Social Security and Medicare, as well as reducing discretionary spending in areas like defense and federal administration​.

  3. Simplifying the Tax Code: Simplifying the tax system by eliminating deductions and credits can make it more efficient and fair, potentially increasing revenue by closing loopholes that allow individuals and corporations to reduce their tax liabilities.

  4. Shared Sacrifice Across Tax and Spending: Achieving debt reduction requires a balance between increasing revenues and reducing spending, ensuring that the burden is shared across various sectors of the economy. This approach encourages equitable contributions from both tax hikes and spending cuts​.


Reforming Social Security and Entitlements

Reforming Social Security and entitlement programs is vital to addressing their financial strain due to an aging population and rising costs. Key reforms include adjusting the retirement age, increasing payroll taxes, and controlling healthcare spending to ensure the long-term sustainability of these critical social safety nets​. 


Challenges of the Current Social Security System

  1. Aging Population: An increasing number of retirees are placing a heavy strain on Social Security as fewer workers contribute to the system​.

  2. Declining Worker-to-Retiree Ratio: The ratio of workers paying into the system compared to beneficiaries is shrinking, reducing the funds available for payouts​.

  3. Trust Fund Depletion: The Social Security trust fund is projected to be depleted by the 2030s, which could lead to benefit reductions if no reforms are enacted​.

  4. Longevity Increase: As people live longer, they collect benefits for more years, further straining the system​.

  5. Revenue Shortfalls: Payroll tax caps limit the amount of income subject to Social Security taxes, resulting in insufficient revenue to meet future obligations​.

These challenges highlight the need for reforms to ensure Social Security's long-term sustainability.


Platforms like Shepherd Outsourcing act as intermediaries, reducing stress for debtors and facilitating more favorable settlement terms​. Talk to us now!


Proposals for Retirement Age Adjustments

  1. Gradual Increase in Full Retirement Age: Proposals suggest raising the full retirement age from 67 to 69, gradually over time, to reflect longer life expectancies​.

  2. Indexing Retirement Age to Life Expectancy: Some propose linking the retirement age to increases in life expectancy, automatically adjusting the age as people live longer​.

  3. Delaying Early Retirement Eligibility: This proposal delays the earliest age for receiving Social Security benefits, currently 62, to encourage longer work lives.

  4. Adjustments for Physically Demanding Jobs: Introduce exceptions for those in physically demanding jobs to avoid disproportionately impacting their retirement options​.