Last week, Market Watch in The Wall Street Journal carried this headline: U.S. on “unsustainable” budget course: CBO debt to reach 100% of GDP in 25 years, agency estimates.
The CBO (Congressional Budget Office) came out to tell the world that our government spending is leading us down an unsustainable path.
Here are a few important points from the article you should know:
• The nonpartisan Congressional Budget Office said that the US national debt is now 73 percent of gross domestic product, the highest in history except for a period around World War II. The figure is twice the percentage it was at the end of 2007.
• It warned that under current law, growing future deficits will push the debt to 100 percent of GDP 25 years from now. And under another scenario they envision changes being made to some laws — including removing the so-called automatic budget cuts known as the sequester — resulting in the debt being even higher, at nearly 190 percent, by 2038.
• Social Security, Medicare, and Medicaid alone are on a path of costing 14 percent of GDP by 2038. That represents $1 out of every $7 made throughout the entire economy on just those three items.
Ultimately, the CBO is telling our government that they need to stop fooling around and make significant changes to the so-called entitlement programs or the programs will collapse our economy. Many people, including myself, think that our government is dysfunctional at best and corrupt at worst. How long will they continue to ignore the obvious?
That’s not good news for Americans to have our government acting like irresponsible children. You might want to be aware of, and perhaps plan for, the following three things:
1. Assume Medicare benefits will be reduced in the future. That means you need to have money in your retirement portfolio that you will want to earmark to help out with your future potential expenses.
2. Assume tax rates will increase. This will have a potentially large impact on your IRAs and 401ks. It’s a good time to convert those IRAs and other retirement accounts to Roth IRAs and life insurance.
3. Assume inflation will become more significant in the future. One of our government’s favorite ways to fix problems like this is to inflate the dollar while keeping benefits at a constant level, or inflating the benefits at a slower rate. You might want to plan on inflation playing a more important role as we move forward.
When all is said and done, it should come as no surprise that our government’s spending habits will lead down a road of ruin, just like a household that continues to spend more than it brings in. I don’t want to be Mr. Doom and Gloom, but at the same time, ignoring reality is pretty dumb. Are you prepared for the consequences of a dysfunctional government?