Repair our fiscal condition

I have been writing about the coming fiscal crisis for years and I continue to be dismayed how little interest the public has in the issue. Most of us would never dream of leaving a debt to our children. Yet that is precisely what we are doing — $155,000 for every man, woman, and child of the generations following the boomers.

Annual deficits remain large even during economic expansions. Rising interest costs are one of the fastest-growing components of federal spending. They compound deficits and erode fiscal flexibility. Without corrective action, debt will continue to grow faster than the economy, crowding out private investment and limiting the government’s ability to respond to recessions or national emergencies.

Institutional impediments to a solution

The behavioral aspects of this issue make it one of the hardest we face. Several things stand out. First, the Democrats (other than four surplus years under Clinton) have never acknowledged the nature of the problem and perennially propose to solve all problems with increased spending. Republicans, on the other hand, only seem to care about fiscal discipline when they are in the minority. When in the majority, they have a history of spending more recklessly than the Democrats. The result is neither party can be relied on to address the issue.

The final constraint is public behavior. The public will not care about this problem as long as it remains theoretical and not practical. Yet that is precisely what is happening, and neither party has been willing to say so plainly. History offers no shortage of warnings. Who saw in advance the 1929 crash, the great inflation of the 1970s, the dot-com collapse of 2000, or the financial crisis of 2008? No one. That is the definition of a bubble. You don’t know you are in it until it bursts.

The facts

Federal debt held by the public has risen from roughly 35 percent of GDP in 2004 to 73 percent in 2014, and to approximately 97 percent in 2024. On a gross basis, total federal debt has exceeded the size of the U.S. economy since 2013. This rise has occurred despite long periods of economic expansion, confirming that the problem is structural, not cyclical.

Annual deficits reinforce this trajectory. In 2004, the federal deficit equaled 3.4 percent of GDP; in 2014, 2.8 percent; and in 2024, approximately 6.4 percent, even in the absence of recession. Persistent primary deficits, combined with higher interest rates, now cause debt to compound automatically. Net interest outlays—once a manageable budget line—have grown from roughly 1.3 percent of GDP in both 2004 and 2014 to just over 3.0 percent in 2024, making interest one of the fastest-growing components of federal spending.

Without corrective action, debt will continue to grow faster than the economy, crowding out private investment and limiting the government’s capacity to respond to future recessions, geopolitical shocks, or national emergencies. Younger and future Americans will inherit higher debt service costs and fewer fiscal resources available for growth-enhancing public investment. Fiscal sustainability is not an abstract accounting exercise; it is a prerequisite for long-term economic vitality, intergenerational fairness, and national resilience.

A three-phase solution

A credible fiscal strategy must include three phases and proceed in sequence. First, costs must be reduced where possible. Second, entitlements must be reformed. And finally, and only after the public accepts that the latter are exhausted, revenue increases should be considered.

Cost reduction: applying operational discipline to government

In the private sector, successful businesses relentlessly seek to deliver better products and services at lower prices. The public sector by its nature has been shielded from this competitiveness. It has the further disadvantage of being led by continuously rotating political appointees, often with little or no subject-matter expertise or leadership experience. As a result, there are material opportunities to both reduce costs and improve services by engaging private sector expertise.

Government services can be delivered more effectively and at lower cost when informed by private-sector operational expertise. This does not require privatization of core public functions, but rather professional management, modern systems, and clear accountability for results. Improper payments alone — stemming from eligibility errors, fraud, and administrative breakdowns — exceeded $230 billion in FY2023, according to PaymentAccuracy.gov.

Recent attempts to address these issues, including the Department of Government Efficiency (DOGE), were directionally correct but undermined by poor execution, politicization, and insufficient institutional authority. Future efforts must be structured differently: Insulated from partisan cycles, staffed by experienced operators, and empowered to redesign processes rather than merely recommend marginal cuts. Cost reduction should be understood not as austerity, but as a means of delivering higher-quality public services at sustainable cost.

Entitlement reform: confronting the core driver of long-term deficits

Long-term fiscal sustainability is impossible without reforming federal entitlement programs, particularly Social Security and Medicare. Together, these programs account for approximately 36 percent of total federal outlays in FY2024 — about 22 percent for Social Security and 14 percent for Medicare — before interest costs. Their growth is driven primarily by demographics rather than annual policy decisions.

As the population ages and life expectancy rises, costs will accelerate while the ratio of workers to beneficiaries continues to fall. Absent reform, entitlement growth will crowd out all other priorities or require persistent borrowing at an expanding scale.

These programs already face clear solvency deadlines. The Social Security Trustees project that the Old-Age and Survivors Insurance (OASI) trust fund will be depleted in 2033, at which point scheduled benefits would exceed revenues by roughly 20–25 percent, triggering automatic benefit reductions under current law. Medicare faces similar pressure: The Hospital Insurance (Part A) trust fund is also projected to be depleted in 2033, with costs continuing to grow faster than GDP due to population aging and healthcare cost dynamics.

Sensible changes focused on sustainability, fairness across generations, and protection for the most vulnerable are unavoidable if the federal budget is to be brought under control.

For Social Security, there is little choice mathematically but to consider increasing the retirement age and means-testing benefits.

For Medicare, we will also have to consider increasing the eligibility age, raising deductibles and co-pays, and increasing the earnings adjustment for premiums.

Revenue increases: a last resort, not a first response

If, after a sustained and credible effort to reduce costs and reform entitlements, additional revenues are still required, the public is likely to tolerate necessary and well-justified tax increases. Historical experience suggests that voters are more willing to accept higher taxes when government has first demonstrated discipline and seriousness on spending.

Importantly, the overall federal tax burden has not risen materially over time. Federal receipts averaged 16–18 percent of GDP over the past two decades, including 15.4 percent in 2004, 17.2 percent in 2014, and 16.8 percent in 2024. This stability underscores that the fiscal problem is driven primarily by spending growth rather than declining revenues.

Any revenue discussion should therefore be framed around fiscal sustainability and economic capacity — not class warfare. Calling it a “fair share” debate is a way of avoiding serious policy. A durable fiscal settlement requires persuading those with greater capacity to contribute that long-term stability, lower interest costs, and predictable policy are in their own interest.

Most tax debates center on the rates paid by the wealthy. What is often overlooked is the total cost of tax expenditures, often referred to as tax breaks. In 2025, the federal government lost $2.2 trillion in revenue through tax expenditures — more than it spent on any single program. The majority of these benefits flow to those with incomes above $200,000. In effect, this is welfare for the wealthy and should be examined before increased rates are considered.

Recent IRS data show that the top 10 percent of earners pay roughly 72 percent of federal individual income taxes, and the top one percent pay about 40 percent. This is not a system in which high earners are free riders. Treating additional revenue primarily as a moral corrective misstates reality and weakens the coalitions needed for reform.

Conclusion: credibility, sequence, and trust

Fiscal repair requires credibility. That credibility comes from recognizing fiscal realities, sequencing reforms intelligently, and rejecting false choices between growth and responsibility. Cost reduction, entitlement reform, and revenue increases together form a coherent strategy to stabilize debt, restore fiscal flexibility, and protect future generations. The alternative is continued drift, rising interest costs, and a narrowing set of choices imposed by markets rather than made through democratic deliberation.

Sources

•  Federal Reserve Bank of St. Louis (FRED), Federal Debt Held by the Public as Percent of GDP (FYGFDPUN).

•  U.S. Treasury, Debt to the Penny.

•  Office of Management and Budget, Historical Tables, Table 1.2 (Budget Balance as % of GDP).

•  Congressional Budget Office, The Budget and Economic Outlook: 2024–2034.

•  PaymentAccuracy.gov, Improper Payments Data, FY2023.

•  Social Security Administration, 2024 Trustees Report, OASI Trust Fund Projections.

•  Centers for Medicare & Medicaid Services, 2024 Medicare Trustees Report, Hospital Insurance Trust Fund.

•  Peter G. Peterson Foundation, Budget Basics: Tax Expenditures.

•  Internal Revenue Service, SOI Tax Stats — Individual Statistical Tables by Tax Rate and Income Percentile.