Last month, the United States crossed another remarkable financial milestone when the national debt exceeded $40 trillion for the first time. With no signs of it slowing down, today I thought it would be useful to take a closer look at what it might it might mean for us moving forward.
For context of what exactly how much $40 trillion worth of debt is, if we spread it evenly across every man, woman, and child in the United States, the national debt amounts to roughly $117,000 per person. In comparison, in 2022, when the debt crossed the $30 trillion mark, this amount was approximately $90,000 per person.
Many on the right argue that a major part of solving this debt crisis is to grow our way out of it. After the national debt crossed $40 trillion, Trump said that “the way you take care of debt is with growth” and argued that strong economic growth would make the debt easier to manage. Conservatives often argue this can be done by stimulating the economy by cutting taxes.
But is growth alone really enough? Since early 2022, the S&P 500 has risen nearly 70%, nominal GDP has increased almost 30%, and household net worth has grown by about 23%. Yet even during a period of strong economic and asset growth, the national debt has increased by roughly 33%. In other words, despite a remarkably favorable environment for building wealth and expanding the economy, our debt has still grown even faster. That should, at the very least, be troubling.
The greater concern, however, is not simply how much debt we have accumulated, but how quickly it is beginning to snowball. According to the Congressional Budget Office, the federal government is already spending more than $1 trillion a year just on net interest, and they project that figure could more than double to approximately $2.1 trillion by 2036. At the same time, an aging population is placing increased pressure on Social Security and Medicare as more Americans become eligible for benefits and health care costs continue to rise.
Current projections show the Social Security retirement trust fund exhausting its reserves in 2032, after which incoming payroll taxes would cover only about 78% of scheduled retirement and survivor benefits. To keep benefits from being reduced, the difference will have to come from some combination of increased payroll taxes on workers or from the general fund, which will only increase total deficit spending. In fact, by 2036, the CBO predicts nearly 60 cents of every federal dollar will go toward Social Security, Medicare, and interest on the national debt alone.
If this data isn’t alarming enough, consider that over the past several decades, we have become accustomed to massive government stimulus packages whenever economic downturns happen. During the financial crisis of 2008, Washington responded with roughly $1 trillion of deficit spending on tax rebates and stimulus spending. Then, in 2020, we blew those numbers out of the water, adding approximately $5 trillion in COVID relief measures. In my opinion, it would be naïve to think that whatever once-in-a-generation crisis comes next, we won’t respond with more spending of money we don’t have.
The United States remains the wealthiest and most productive nation in the world, and I certainly do not believe a $40 trillion debt means financial collapse is inevitable. Economic growth and technological innovation can help, but these things alone cannot erase the reality that our debt, entitlement obligations, and interest costs are becoming increasingly difficult to manage. Before long, we may not be able to choose between spending less, collecting more, or revising the promises we have already made. We may be forced to do all three. The longer we postpone those decisions, the more difficult, and potentially painful, they are likely to become.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)