Foreign media: US finances are facing a clearer timeline. Kent Smetters, head of the University of Pennsylvania budget model, argued that if medical and retirement-related spending continued to increase in line with past trends, the United States federal debt could approach the affordable ceiling in the next 20 years, and financial markets might respond first.

The US debt ceiling is estimated at 210% of GDP.

In its latest analysis, Smetters suggested that if United States federal debt rose to about 210 per cent of GDP, it would be difficult for the fiscal sector to cover interest costs through a broad income tax. He stressed that this was not a projection, but an external ceiling for fiscal sustainability.

As measured by the Pentawalton budget model, the United States may have touched this ceiling in about 20 years, with a quarter of the probability going forward to 14 years, when health-care costs continue to grow faster than overall growth. The median “sealed year” given by the model can be 2045 at the earliest, and the more optimistic scenario is around 2051.

In his view, while the market still acquiesces in the eventual steps taken by Congress to stabilize the finances, this confidence is not unlimited. Once investors no longer believe that the United States can repair the fiscal path, market volatility may be ahead of the mathematical limit.

Ageing expenditure continues to be high

Smetters points to the core of pressure as US fiscal bias towards spending on older groups. He indicated that per capita spending on older persons in the United States was about 10 times that of young people and, in total terms, about six times that of the latter.

In April this year, the Pentawalton budget model estimated that approximately $2.7 trillion of federal expenditure, or 38.6 per cent of total expenditure, or 61.9 per cent of the expenditure that could be allocated by age was spent by persons aged 65 and over. By contrast, the corresponding expenditure for the 26-64 age group was about $1.2 trillion and for the 26-year-old age group about $44.9 billion.

In his view, there were incentives for the United States political system to defer bills to the next generation, which prolonged the fiscal adjustment. As the baby boom generation gradually withdraws from the economic and political core, this structural pressure may become more concentrated.

Social security funds or pressured in the early 2030s

Smetters also mentioned that the Old Age Welfare Trust in the United States social security system could have run out in the early 2030s. He claims that his team had earlier made an earlier judgement about the point at which income was not sufficient to cover welfare expenditure, that the main fund had been estimated at the end of 2032 and that it was later confirmed by the official trustee report and the Congressional Budget Office.

It is estimated that, once the Trust Fund has run out, the project will be able to pay only about 83 per cent of the established benefits, and that this percentage will continue to decline. However, he did not believe that that point in time was in itself sufficient to compel Washington to act quickly.

AI Growth is hard to overcome alone

Smetters have reservations about the view that “AI promotes growth to ease fiscal pressure”. In his view, even if AI were to lead to higher growth, government spending could rise at the same time, and it could not simply be understood that the expansion of the tax base was sufficient to offset the fiscal gap.

He also proposed a more radical approach to adjustment, namely the elimination of 401 (k) and 403 (b) tax exemptions on contributions and the shift of this fiscal space to non-contributory retirement accounts for low-income workers. According to his earlier estimate, the equivalent fiscal revenue loss over 10 years was about US$ 1.3 trillion to US$ 1.4 trillion.

Markets or alarms before limits.

According to Smetters, the real risk does not necessarily occur at the peak of debt, but may occur at an earlier stage. He cited as an example the financial turmoil in the British former Prime Minister, Tlax, that the United States might experience similar market constraints in the next 5 to 10 years.

This is based on the fact that, even if the theoretical ceiling has not been reached, when debt enters a higher zone, the expected changes by investors may push up the cost of financing and even trigger refinancing difficulties. According to him, the consequences of fiscal disorder would not be confined to the bond market, but could further undermine political and social stability.