The history of Tariffs is a history of the United States from early trade done by local British and Colonial import/exporters to the uniform standards of the Tariff Act of 1789 introduced by James Madison and advocated and implemented by Alexander Hamilton that became the primary revenue source for the young nation. From Congressional lists and schedules updated every 5-6 years by Congress to the dynamically negotiated agreements done by the Executive branch we have today. From an instrument of revenue to a tool for international trade, geopolitical power, and protection of National interests, Tariffs have been used throughout US History. From the disastrous effects of the Smoot-Hawley act to the triumphs of Post World War II Bretton Woods frameworks leading to our current Global Trade.
The First Congress establishes tariff duties as the primary federal revenue source. Congress sets detailed product-specific rates, leading to centralized customs collection at major ports.Significance
Major source of Revenue for United States
Establishes Congressional Authority over Tariffs
First attempt to standardize and provide uniformity to Tariffs across Colonies
Tariff Act of 1828 – a.k.a. Tariff of Abominations – Protective tariffs aimed at Northern industries cause tensions increasing cost of living in the South, leading to the Nullification Crisis when Vice President John Calhoun anonymously penned the Nullification Doctrine which emphasized a state’s right to reject federal laws within its borders and questioned the constitutionality of taxing imports without the explicit goal of raising revenue. Congress still sets rates but political conflicts highlight tariff complexity.
Significance
Establishes use of Tariffs as a Protectionism mechanism to protect domestic industry.
Establishes Congressional Authority over Tariffs
Created Political tension between the winners and losers of any Tariff policy.
The McKinley Tariff Act of 1890 was a high protective tariff raising rates on many imports. Congress remains central in setting rates, with protectionism as a goal. Introduces role of Executive Branch.
Significance
Introduced the concept of reciprocity, lowering tariffs if other country lowered theirs
Introduced role of Executive Branch to manage reciprocity agreements
Wilson-Gorman Tariff Act of 1894 attempts reduction of rates on imported goods and introduces a federal income tax. The income tax is struck down by the Supreme Court until it was re introduced after the passage of the 16th Amendment in 1913, reinforcing tariffs role as major revenue in early America.
Significance
Reduced tariffs on imported goods, reflecting a shift towards lower tariffs
Introduced the concept of Income taxes to offset lower tariff revenue
Contributed to the debate on protectionism vs. free trade, impacting economic policy and government revenue sources.
Creation of the U.S. Tariff Commission: A bipartisan body established to advise Congress with expertise, marking increasing professionalization in tariff policy.
Significance
Predecessor to the US International Trade Commission (USITC)
Led by Frank Taussig, Harvard Professor
Created as part of the Revenue Act of 1916 which introduced Income Taxes
Replaced ad hoc lobby driven policies with analytic and scientific studies and recommendations
Smoot-Hawley Tariff Act – further high tariff rates designed to help farmers exacerbate international trade tensions and the Great Depression. Congressional tariff-setting continues but criticism grows.
Significance
Started Global Trade War – caused retaliatory tariffs and significantly reduced International trade
Considered to contribute to worsening the Great Depression
Global trade levels dropped roughly 2/3rds from 1929 to 1934
Reciprocal Trade Agreements Act (RTAA): Congress delegates authority to the president to negotiate bilateral trade agreements and adjust tariffs within limits dynamically. Beginning of executive role in tariff management.
Significance
Congressional delegation of bilateral trade agreements to the Executive Branch
Allowed President to negotiate +/- 50% of existing Smoot-Hawley Tariff rates
Set Reciprocity as fundamental to negotiating Tariffs that US tariff cuts only if US got a cut in return
Moved Tariffs from Congressional lists to Executive bargaining
Unconditional Multi Lateral Most Favored Nation (MFN) clauses – if you cut Tariff X every country gets the best rate – default multi lateral
GATT (General Agreement on Tariffs and Trade) created a post World War II pact that set the rules for non-discriminatory, tariff-based trade among market economies.
Significance
Locked in Most Favored Nation non-discrimination (Article I): any tariff cut for one member extends to all.
Created bound tariff schedules (Article II), making cuts durable and harder to reverse.
Ran multilateral “rounds” that progressively lowered global tariffs.
Established early dispute settlement norms and a rules-based trading system.
Laid the institutional foundation for the World Trade Organization (WTO)
IEEPA (International Emergency Economic Powers Act) a 1977 U.S. law that lets the President, after declaring a national emergency tied to a foreign threat, block property and restrict transactions to protect national security, foreign policy, or the economy.
Significance
Requires the President to declare a national emergency about a foreign threat.
Allows assets to be frozen and block or allow specific transactions (through OFAC).
Common used for sanctions to limit trade and finance with certain countries, people, or sectors.
Executive branch must report to Congress, and courts can review.
Modern Trump tariffs: The Executive branch imposes broad tariffs using delegated authority and emergency powers to negotiate reciprocal deals. The deals create leverage for US interests, and represent a shift from multilateral deals to US first agreements.
Significance
Broad Tariffs as a negotiating tool in the strong Executive model of negotiation
Goal to reset trade expectations with partners where free trade is reciprocal
Used in geopolitical great power check to limit economic and military threat of potentially hostile peers
Leveraging Emergency Powers (IEEPA) to act on non trade and economic interests like Border Security, and Fentanyl enforcement.
How the U.S. Could Reduce Debt Without Breaking the Economy
The U.S. National Debt just passed $38 trillion according to the US Treasury’s Debt to the Penny. [1][2] Not all debt is bad, but if it gets too large then debt can matter a lot, even those denominated in a fiat currency, because interest costs compound and grow they can crowd out other national priorities. Growing up your parents may have told you that it’s a lot easier to get into something, then to get out. That is especially true for debt, easy to get in, and painful to get out. Now that we have reached the point where interest payments are over $1 trillion annually, the US has crossed into that uncomfortable territory. The real challenge is to bring debt growth under control without causing a recession or a bout of high inflation. Ray Dalio, a billionaire hedge fund manager who has written books on Why Nations Succeed and Fail, and How Countries go Broke, popularized the idea of a “Beautiful Deleveraging” – a balanced, multi-year process that reduces the painful process of deleveraging when lowering debt burdens through a mix of growth, moderate inflation, controlled austerity, and targeted debt adjustments, rather than a painful deleveraging that could lead to recession, extreme reductions in services, tax increases, and austerity measures. [3][4]
This piece frames what a Beautiful Deleveraging could look like for the United States, why it’s hard, the challenges faced, and how policy could balance the Deflationary forces of tightening with the Inflationary tools sometimes used to ease the adjustment—aiming for a soft landing that improves the country’s long-run fiscal and economic health, while minimizing the pain along the way.
Current Status
National Debt: The National Debt stands at just over $38 trillion (gross) with over $30 trillion of which is Debt held by the public. [2]
Deficits: Structural Annual deficits running over $1trillion at around ~6% of GDP. [5][6]
Interest Costs: Net Interest over $1 trillion annually. The Congressional Budget Office (CBO) Long-Term Budget Outlook (March 2025), Net Interest reaches 5.4% of GDP by 2055, up from ~3.2% of GDP around 2025. [7][8] Independent analysis by the Committee for a Responsible Federal Budget (CRFB) highlights a related pressure point: by the 2050s, net interest would consume roughly 28% of federal revenues, absent policy changes. [9]
According to CBO’s latest long-term outlook, by 2055 total Federal outlays (spending) are projected at about 26.6% of GDP, with Net Interest (interest paid on National Debt) near 5.4% of GDP. That means that roughly one-fifth (~20%) of Federal spending will be used to pay interest on the debt. At that scale, interest costs rival or exceed most standalone programs and risk crowding out other priorities if unaddressed. [7][8][9]
What “Beautiful Deleveraging” Means
In Economic terms, Beauty is about reducing debt while avoiding (or at least minimizing) the painful parts of deleveraging and therefore managing that successfully can be Beautiful. Dalio’s Deleveraging framework was originally developed to explain past debt cycles and emphasizes a balanced mix of tools so that the economy can reduce debt without crashing demand and involves these components:
Spending Restraint (public and private demand constraint),
Income growth (real GDP growth),
Debt Restructuring or Terming out (Monetary intervention when necessary), and
A measured amount of Money/Credit creation (Moderating and managing inflation).
These components, when executed with great skill, political courage, and balance, can help the economy grow enough to ease debt ratios while avoiding a deflationary spiral. [3][4]
For a sovereign like the U.S., that balance translates into a policy with credible fiscal consolidation, productivity-oriented growth policies, and a monetary policy that avoids both runaway inflation and hard-landing deflation. Because the U.S. issues debt in its own currency with deep capital markets, it has more room to maneuver than most, but it is not immune to arithmetic: if interest rates (R) run above growth (G) (See our Article on R > G), debt ratios tend to rise unless deficits are reduced. CBO’s long-term projections foresee precisely this pressure in their future outlook. [9]
Pain Points: Why Deleveraging Is Hard
There is a reason it’s hard, in general large broad spending cuts, and more and higher taxes are not popular. While the components and levers are well known, it takes a healthy amount of political courage to propose policies that maybe unpopular, a great deal of skill and coordination to execute these policies, and likely a good amount of luck and good timing for a sustained period likely across several administrations. A deleveraging can proceed along two of these painful paths, spending cuts and tax increases, and each has tangible real-world consequences:
Spending cuts: Less public consumption and investment, fewer or slower growth in transfers, and potentially fewer (e.g. program eliminatinos) or lower service levels (e.g., processing times, enforcement, infrastructure maintenance). In macro terms, cuts are deflationary, they reduce aggregate demand, which can cool inflation but also growth and employment in the short run.
Tax increases: Higher effective tax rates reduce disposable income and/or after-tax returns to investment, is also deflationary. Design matters: broadening the base (fewer exemptions) generally distorts behavior less than steep marginal rate hikes, but either path tightens demand.
Because both mechanisms have a contractionary/deflationary impact and create conditions that can lead to recession, economic hardship, and job loss, a multi-year consolidation approach is part of Dalio’s framework. Instead of a fiscal cliff and extreme austerity based spending cuts; Dalio’s approach phases changes over time; and pairs tighter budgets with growth-friendly policies (innovation, expansion, permitting, skills, productivity increases) that lift the supply side. The goal is to keep nominal GDP growth (real growth + inflation) from collapsing, otherwise debt-to-GDP can rise even while you cut, because the revenue denominator shrinks.
Deleveraging Menu (and Their Trade-offs)
The Tax Project has outlined (See our Article: “Ways Out of Debt”) a non-exhaustive review of policy options to deleverage. Below we provide a summary group them by mechanism. [10]
1) Consolidation via Revenues (Tax Increases)
Summary: Revenue measures (Tax Increases) are deflationary near-term but can be structured to minimize growth drag (e.g., emphasize consumption/external taxes with offsets, or reduce narrow, low-value tax expenditures).
2) Consolidation via Outlays (Spending Cuts)
Summary: Spending cuts can be deflationary; pairing it with supply-side reforms (education/skills, streamlined permitting for productive investment, R&D incentives, labor force productivity growth) can mitigate growth losses and raise potential output over time.
3) Pro-Growth, Supply-Side Reforms (Growth)
Summary: Growth and Supply side reforms (e.g. Productivity, Innovation, Permitting, Energy inputs) that generate real productive growth is the least painful way to lower debt-to-GDP without relying on high inflation.
4) Inflation and Financial Repression (Print Money)
Summary: Modest inflation can ease real debt burdens, part of Dalio’s balance, while managing highly destructive excess inflation. That is why the “beautiful” approach uses only modest inflation alongside real growth, fiscal and monetary management, not inflation as the main lever. [7][9]
The Sooner we Start, the Easier it is
The bottom line is, the longer we wait the harder it gets, the problem will not go away on its own, it only gets worse over time. The 2025 CBO long-term outlook provides a forecast, and it doesn’t paint a great picture:
Debt Outlook: Debt held by the public rises toward 156% of GDP by 2055, under current-law assumptions. [8][11]
Outlays vs Revenues: Outlays (spending) climbs from ~23.7% of GDP (2024) to 26.6% (2055); revenues rise more slowly to 19.3% – expanding an already large and persistent structural gap. [8][12]
Net interest: Reaches 5.4% of GDP by 2055—roughly one-fifth of total federal outlays and around 28% of Federal revenues. [7][8][9]
Those numbers underscore the reason to start now: the later the adjustment, the harder the challenge required to stabilize debt. Conversely, a timely package that the public views as credible and fair can anchor long-term rates lower than otherwise, reducing the interest burden mechanically.
A “Beautiful” U.S. Deleveraging
The Tax Project does not propose or advocate specific policies, however a workable plan using the Dalio Framework would likely include a mix of the following components aimed to stabilize debt-to-GDP within a decade and then bend it downward while sustaining growth and guarding against excessive inflation relapse. A balanced approach:
A multi-year fiscal framework enacted up front allowing for a ordered and measured deleveraging.
Credible guardrails: Deficit targets linked to the cycle; a primary-balance path that improves gradually, with automatic triggers to correct slippage.
Composition: Roughly balanced between base-broadening revenues and spending growth moderation in the largest programs (phased in).
Quality: Protect high-return public investment; target lower-value spending and tax expenditures first.
Administration: Resource the revenue authority to improve compliance; align incentives and simplify.
A growth package to offset the deflationary impulse.
Supply-side reforms with high ROI: energy and infrastructure permitting; skilled immigration; workforce skills; competition policy that fosters innovation and productivity tools.
Private-sector: Reduce regulatory frictions that impede capex expenditures in goods and critical infrastructure.
Monetary-Fiscal Coordination in the background—not Fiscal Dominance.
Monetary-Fiscal Coordination: The Federal Reserve keeps inflation expectations anchored; it does not finance deficits but it can smooth the adjustment by responding to the real economy and anchoring medium-term inflation near target. Over time, a credible Fiscal policy promoting growth helps bring Rates (R) down toward Growth (G), easing the arithmetic. [7][9]
Contingency tools (use sparingly)
“Terming out” Treasury debt Lock in more fixed, long-term loans and rely a bit less on short-term IOUs. Why it helps: If rates rise, less of the debt has to be refinanced right away, so interest costs don’t spike as fast. If the term premium is reasonable and the Fed is in an accommodative stance, shorter term lower rate treasuries maybe attractive to reduce Net Interest expenses.
Targeted restructuring (not the federal debt—specific borrower groups) Adjust terms for groups where relief prevents bigger damage (e.g., income-based student loan payments, disaster-area mortgage deferrals). Why it helps: Stops small problems from snowballing into defaults and job losses while the government tightens its own budget.
This mix qualifies as “beautiful” by balanacing inflationary and deflationary elements. It shares the burden across levers; it avoids hard financial shocks; it relies primarily on real growth + structural balance rather than high inflation or sudden austerity. Done credibly, long-term rates fall relative to a laissez-faire (do nothing) approach, lowering interest costs directly and via lower risk premia. The country benefits both intermediate (by not inducing a recession and harsh economic measures), and long term freeing up revenue to more productive uses than Debt payments, and supporting growth.
Managing the Macro Balance: Deflation vs Inflation
All this sounds good, but the practical art is to offset deflationary consolidation with pro-growth supply measures, not with high inflation. Consider the balancing act between these different variables:
Consolidation (deflationary): Fiscal discipline reduces demand, manages structural gaps, good for taming inflation; risky for growth if overdone or badly timed.
Growth Reforms (disinflationary over time): Expand supply, lower structural inflation pressure; raise real GDP and productivity, improving the debt to GDP ratio.
Monetary Stance: Should keep inflation expectations managed; if growth softens too much, gradual monetary easing is available if inflation is on target.
Inflation temptation: Modest inflation can reduce some of the burden mechanically, but leaning on inflation as the adjustment tool can backfire if markets demand higher interest rate (term) premiums; nominal rates can rise more than inflation, worsening R > G and Net interest. CBO’s baseline already shows interest outlays rising markedly even without an inflationary strategy. [7][9]
A “Beautiful Deleveraging“ aims too creates a “soft landing” keeping nominal GDP growth positive, inflation expectations managed, and real growth strong enough that debt-to-GDP falls without creating undue Economic hardships. Managing each of these variables with the often blunt tools available, many of which don’t manifest for months, or years is quite the magic trick, requiring patience, skill, and acumen.
Risks and Pitfalls
The road ahead can be bumpy and full of challenges, managing the risks is key to a successful deleveraging. Here are some areas that can derail a “Beautiful Deleveraging.”
Front-loaded austerity that slams demand into a downturn or recession; a gradual path anchored by rules and automatic stabilizers is safer and creates less hardships. It means that we will endure less pain over a longer period. Some may want to rip the band aid off and take the measures all at once.
Policy whiplash (frequent reversals) that destroys credibility and raises risk premia (higher Interest rates); stable consistent policies beat one-off “grand bargains” and political vacillations.
Over-reliance on rosy outlooks; plans should make conservative growth assumptions, and reasonable baselines.
“Kicking the can” down the road with laissez-faire policies until interest dominates the budget, leaving painful, crisis-style adjustments as the only option is the biggest of all the Risks. CBO’s outlooks illustrates how waiting raises the eventual cost, and negative consequences. [7][8][9]
Is it Worth it?
On the surface, that’s an easy question, however the answer may pit generations against each other each with their own point of view and different perspectives. Current generations at or near retirement who may not see the worst effects of a laissez-faire policy may see the risk of recession, and cut backs in service as an unacceptable change to their Social Contract which they may have worked a lifetime under a set of expectations that they counted on. Younger generations, may see it as generational theft, placing an undue burden on them for debt they had little or no part in creating. Both are valid perspectives, however, the long term effects of a “Beautiful Deleveraging” will deliver these positive durable payoffs for the Country:
Out of Doom Loop: High debt is a trap, as out of control interest expenses rise, debt grows and the gap between revenue and debt rises in a self reinforcing doom loop. Breaking that loop is key to a healthy economy.
Lower Interest burden: As debt drops, so does Net Interest expenses. Instead of crowding out other expenses, revenue is freed up to other National Priorities (e.g. Healthcare, Education, Infrastructure, Social Services, Surplus, Sovereign Wealth). [7][9]
Greater Macro resilience: With manageable debt exogenic shocks, pandemics, wars, financial events, give the Government financial space to manage these events without taking on negative levels of debt.
Higher Trend growth: When consolidation is paired with genuine productivity reforms, lower debt ratios are correlated with higher growth, supporting living standards and the tax base. [14][15][16]
Summary
A “Beautiful Deleveraging” is but one way to approach the intractable problem of high debt. It represents a reasonable approach that balances near term realities with long term impacts. Our choices now will define the America of the future, and the quality of life younger Americans will have and future generations will inherit. Will it be painless? Probably not, it will likely require some sacrifice and discipline. The challenge wasn’t created in a short period, and it won’t be solved in a short period. Is it achievable? If we face the truth with candor about trade-offs, accept phased steps that the public deems fair, and have a bias toward investments that raise long-term productive capacity, than it is possible. The biggest question is the will of the American people. That, more than any single policy, will determine our future. At the Tax Project we will always bet on informed Citizens making the best choices for America – we will always bet on America. That defines the essence of a “Beautiful Deleveraging.” [3][4][10]
Citations
[1] U.S. Department of the Treasury, America’s Finance Guide: National Debt (accessed Oct. 2025): “The federal government currently has $37.98 trillion in federal debt.” (fiscaldata.treasury.gov)
[2] Joint Economic Committee (JEC) Debt Dashboard (as of Oct. 3, 2025): Gross debt ~$37.85T; public ~$30.28T; intragovernmental ~$7.57T. (jec.senate.gov)
[3] Ray Dalio, What Is a “Beautiful Deleveraging?” (video explainer). (youtube.com)
[4] Ray Dalio, short-form clip on “beautiful deleveraging.” (youtube.com)
[5] Reuters coverage of CBO near-term deficit path (FY2024-2025). (reuters.com)
[6] Associated Press summary of CBO’s 10-year outlook (debt +$23.9T over decade; drivers). (apnews.com)
[7] Congressional Budget Office, The Long-Term Budget Outlook: 2025 to 2055—headline results: net interest 5.4% of GDP by 2055; outlays path. (cbo.gov)
[8] Peter G. Peterson Foundation, summary of the 2025 Long-Term Outlook: outlays to 26.6% of GDP; interest path and historical context. (pgpf.org)
[9] Committee for a Responsible Federal Budget (CRFB), analysis of CBO 2025 outlook: interest consumes ~28% of revenues by 2055; R > G later in the horizon. (crfb.org)
[10] Tax Project Institute, Ways Out of Debt: US Options for National Debt (June 14, 2025). (taxproject.org)
[11] Reuters recap of CBO long-term debt ratio (public debt ~156% of GDP by 2055). (reuters.com)
[12] CBO, Budget and Economic Outlook: 2025 to 2035 (context for near-term path). (cbo.gov)
[15] Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The Real Effects of Debt (BIS Working Paper No. 352). Bank for International Settlements.
[16] Eberhardt, M., & Presbitero, A. F. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics, 97(1), 45-58.
Confused about the National Debt, why you hear so many different numbers, and what they mean. Here’s a plain English explainer to help you make sense of it all. The National Debt is the total amount the U.S. Federal government owes to its creditors. It does NOT include the Debt held by State and Local Governments. Think of the National Debt as the running total of past annual deficits (when the government spends more than it collects in taxes and other income) minus any surpluses (when it collects more than it spends). The debt grows when there’s a deficit and shrinks—at least relatively—when there’s a surplus or when growth/inflation outpace new borrowing. [1][5]
Terms you should know:
DEFICIT: A deficit is a one-year budget shortfall (this year’s shortfall, which can occur every fiscal year).
NATIONAL DEBT: The debt is a accumulated total of all Deficits minus any Surpluses (the total outstanding IOUs accumulated over time).
Figure 1 Historical Federal Budget Deficits and Surpluses Source: OMB
The U.S. Treasury’s Debt to the Penny website publishes the official daily total and its two big parts (explained below). You can look up yesterday’s number, last month’s, or data back to 1993. [2]
When people talk about the “National Debt,” they often mean one of three closely related figures:
Debt held by the public This is U.S. Treasury securities (Bills, Notes, Bonds, TIPS, etc.) held outside federal government accounts—by households, businesses, pension funds, mutual funds, state and local governments, foreign investors, and the Federal Reserve (America’s central bank). It’s the broadest “market” concept and is the figure economists often use when comparing debt to the size of the economy (debt-to-GDP). [3][4]
Treasury defines it as “all federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government.” [3]
Intragovernmental holdings These are Treasuries held within the federal government – mainly trust funds such as Social Security and Medicare. When these programs run surpluses, they invest in special Treasury securities; when they run cash shortfalls, Treasury redeems those securities to pay benefits, and the government borrows from the public if needed. [4][1]
Total Public Debt Outstanding This is simply the addition of (1) Debt held by the public + (2) Intragovernmental holdings. This is the top-line number on Debt to the Penny. [2][4]
Total Public Debt Outstanding = Debt held by the public + Intragovernmental holdings
Why the distinctions matter:
Debt held by the public is what markets price and what drives interest costs the government pays to outside holders (including the Federal Reserve).
Intragovernmental debt reflects promises among parts of the federal government; it affects future cash needs but doesn’t have the same market dynamics.
Total Public Debt Outstanding is the full legal amount subject to the debt limit (with a few technical exclusions), which matters for statutory debt-limit debates. [4][5] When there are discussion in Congress about the Debt ceiling this is the number discussed.
How deficits add to the National Debt
Each fiscal year, Congress sets taxes and spending. If outlays (spending) exceed receipts (revenue), the government runs a deficit and must borrow by issuing new Treasury securities. Those new securities add to Debt held by the public, and thus to the total debt. The Congressional Budget Office (CBO) publishes baselines and explains the arithmetic and risks of rising Net interest (what the government pays in interest). In 2024, Net Interest on the Debt alone was over $1 Trillion, making it the 3rd largest budget item, larger than National Defense. [5][7][18][22]
In years with a surplus, Treasury can redeem (pay down) outstanding securities or reduce the need to issue new ones—slowing debt growth. But because recent years have seen persistent deficits, the debt has generally climbed. [22]
“Debt to the Penny”
For the Official US National Debt numbers, you can go straight to Treasury’s Debt to the Pennypage. On the site you can:
See today’s total (updated daily except during weekends and holidays) and the split between debt held by the public and intragovernmental holdings.
Download historical CSVs to chart the series yourself.
Check big shifts around tax dates, debt-limit suspensions, or major fiscal packages. [2][15]
Who does what: Role of Treasury vs. the Federal Reserve
The U.S. Treasury (through the Bureau of the Fiscal Service and the Office of Debt Management) issues Treasury bills, notes, and bonds to finance the government at the lowest cost over time. It auctions securities on a regular calendar and redeems them at maturity. Treasury also manages cash (the Treasury General Account at the Fed) to pay the government’s bills. [4][2]
The Federal Reserve (the “Fed”) is the central bank. It does not set taxes or spending and does not decide how much debt the government issues. The Fed’s role here is monetary policy: it influences interest rates and financial conditions. The Fed has a dual mandate to maintain stable prices (control inflation), and manage Employment (manage environment to keep unemployment low). It buys and sells Treasuries only in the secondary market (from dealers), not directly from the Treasury, to maintain its independence and implement policy. [6]
“The Fed does not purchase new Treasury securities directly from the U.S. Treasury, and purchases…from the public are not a means of financing the federal deficit.” [6]
The New York Fed executes these operations for the System Open Market Account (SOMA), the consolidated portfolio of Treasuries and other securities the Fed holds. [12]
What is Quantitative Easing (QE)?
Quantitative easing (QE) is a policy the Fed uses in severe downturns or when short-term interest rates are already near zero. When the Fed is using QE, the Fed buys longer-term securities, such as Treasuries and agency mortgage-backed securities, to push down longer-term interest rates and support the economy. The Fed conducted several large purchase programs after the 2008 Financial Crisis and again during 2020-21 COVID Pandemic. [8][21][14]
Mechanically, when the Fed buys a Treasury, it pays by crediting banks’ reserve accounts at the Fed. That swaps a Treasury security held by the public for a bank reserve (a deposit at the Fed). Crucially, this transaction does not change the total amount of Treasury debt outstanding—it changes who holds it (more at the Fed, less in private hands). [10][6]
“When the Federal Reserve adds reserves…by buying Treasury securities…This process converts Treasury securities held by the public into reserves…[and] does not affect the amount of outstanding Treasury debt.” [10]
Federal Reserve Balance Sheet
Does QE “add to the National Debt”?
No. QE doesn’t authorize or cause Treasury to borrow more or add to the Debt. The deficit determines how much debt Treasury must issue. QE affects yields and liquidity by changing the composition of holders (more at the Fed/SOMA, fewer in private portfolios), not the quantity of debt the government has issued. The Fed repeatedly emphasizes it does not buy securities directly from Treasury or to finance deficits. [6][7][9] (Federal Reserve)
QE can, however, indirectly affect the budget over time through interest rates (lower yields can reduce Treasury’s borrowing costs; the reverse is true when QT—quantitative tightening—lets the portfolio roll off and rates are higher). Several primers walk through these channels. [17][18][7]
How interest flows work when the Fed holds Treasuries
Here’s the accounting workflow in plain English:
Treasury pays interest on all outstanding Treasuries—whether they’re held by a pension fund, a foreign central bank, or the Federal Reserve. That shows up in the budget as Net interest outlays (spending). [18]
When the Fed holds Treasuries (in SOMA), the interest it receives becomes part of the Fed’s net income.
After covering its expenses, the Fed historically remits (gives back) its profits to the Treasury (these are “remittances”). In years when those profits are large, Treasury effectively gets back a chunk of the interest it paid—reducing the government’s overall cost ex post (after the fact). [9][20]
In times (like 2023-25) when the Fed’s interest expenses (mainly interest it pays banks on reserve balances and reverse repos) are greater than its interest income the Fed stops remitting, records a “deferred asset” (an IOU to itself), and resumes remittances only after it returns to positive net income. That deferred asset does not require taxpayer funding; it’s paid down by future Fed profits before any cash flows back to Treasury. [1][5]
“When the Fed’s income exceeds its costs, it sends the excess earnings to the Treasury…When its costs exceed its income, it creates a ‘deferred asset’…and resumes sending remittances after that is paid down.” [1]
Bottom line: whether private investors or the Fed hold a given Treasury, Treasury’s legal obligation to pay interest is the same. The difference is that Fed-held interest often returns back to Treasury (when Fed profits are positive), lowering the government’s ultimate net cost over time. [9][20]
Review of National Debt Concepts
Debt grows because of deficits. Congress’s tax and spending choices determine if there will be an annual deficit or surplus; deficits add to debt. Surpluses reduce the debt. [5][22]
Debt has two big parts. Debt held by the public (including the Fed) plus intragovernmental holdings (trust funds) equals Total Public Debt Outstanding. [2][4] (Fiscal Data)
QE doesn’t “create” more Treasury debt. It changes who holds it and influences rates and liquidity; the Fed buys in the secondary market and does not finance deficits. [6][10][7]
Interest flows are circular when the Fed holds Treasuries. Treasury pays interest; the Fed usually remits (returns) net income back to Treasury; during periods of negative net income, remittances pause and a deferred asset records what will be repaid from future profits. [1][5][20]
You can verify every number daily on Treasury’s Debt to the Penny site, and pair it with monthly public debt reports for detail. [2][4]
FAQ and Common Misconceptions
“If the Fed buys Treasuries, isn’t that just ‘printing money’ to fund the government?” No. The Fed buys from dealers in the open market, not from Treasury. Fed purchases swap Treasuries for bank reserves; they don’t change the amount of debt or directly finance the deficit. [6][10][7]
“Doesn’t the debt count everything the government owes, including future Social Security benefits?” The debt is legal obligations already issued (Treasury securities). Future promises (like future benefits) affect the budget and future borrowing, but they aren’t counted as debt until the government issues securities to pay for them. These are called Unfunded Liabilities (See our Article). Check the Debt to the Penny site for what is counted. [2][4][5]
“Why do some charts focus only on debt held by the public?” Because that’s the portion traded in markets, driving interest costs and macro impacts. It’s also the number most used in economic comparisons (for example, debt-to-GDP). [5]
Debt Guru: How to read the daily debt like a pro
Visit Debt to the Penny site and note Total Public Debt Outstanding.
Compare the split between public and intragovernmental. Persistent deficits typically raise the public share over time.
If rates are rising (or have risen), expect net interest in the budget to climb; CBO’s primers explain why interest costs can grow faster than the economy when debt is large. [2][18][22]
If you want more depth on how the Fed runs these operations, the New York Fed’s archive on large-scale asset purchases and the Board’s description of the System Open Market Account are the canonical sources. [8][12]
Putting it all into Context
If you want to understand how big the National Debt is, how it relates to other things like the size of our economy, how the budget deficits and surpluses compare in charts over the years historically and how that impacts the debt in charts, check out that and more in the Tax Project Institute’s Smarter Citizen App (A Free Citizen App, just register – no credit card and you’re in!)
Treasury security: An IOU the U.S. government sells to borrow money (Bills mature in a year or less; Notes in 2–10 years; Bonds in 20–30 years; TIPS are inflation-protected). Holders earn interest and get their principal back at maturity. [3]
Debt held by the public: Treasury IOUs owned by investors outside the federal government, including the Federal Reserve. [3]
Intragovernmental holdings: Treasury IOUs held by government accounts (e.g., Social Security trust funds). [4]
QE (quantitative easing): The Fed’s large purchases of longer-term securities to lower long-term interest rates when the economy needs help and short-term rates are generally already lower. [21][8]
Remittances: Fed profits (if any) sent to Treasury after covering expenses; paused when the Fed’s interest expenses exceed income (recorded as a “deferred asset”). [5][1]
References
[1] Board of Governors of the Federal Reserve System. (2024, July 19). How does the Federal Reserve’s buying and selling of securities relate to the borrowing decisions of the federal government?https://www.federalreserve.gov/ (Federal Reserve)
[2] U.S. Department of the Treasury, Fiscal Data. (n.d.). Debt to the Penny (daily dataset; coverage back to 1993). Retrieved October 16, 2025, from https://fiscaldata.treasury.gov/ (Fiscal Data)
[3] U.S. Department of the Treasury. (n.d.). Public Debt FAQs (definitions of debt held by the public & intragovernmental holdings). Retrieved October 16, 2025, from https://treasurydirect.gov/ (TreasuryDirect)
[4] U.S. Department of the Treasury, Fiscal Data. (n.d.). Monthly Statement of the Public Debt (MSPD) (monthly dataset). Retrieved October 16, 2025, from https://fiscaldata.treasury.gov/ (Fiscal Data)
[8] Board of Governors of the Federal Reserve System. (2025, September 23). Interest on Reserve Balances (IORB): FAQs (includes note that asset purchases convert Treasuries to reserves without changing outstanding Treasury debt). https://www.federalreserve.gov/ (Federal Reserve)
[10] Board of Governors of the Federal Reserve System. (2016, August 25). Is the Federal Reserve “printing money” in order to buy Treasury securities?https://www.federalreserve.gov/ (Federal Reserve)
[12] Board of Governors of the Federal Reserve System. (n.d.). Fed Balance Sheet—Table 1 (popup): U.S. Treasury, General Account (definition of the Treasury General Account). Retrieved October 16, 2025, from https://www.federalreserve.gov/ (Federal Reserve)
[13] Board of Governors of the Federal Reserve System. (n.d.). H.4.1—Factors Affecting Reserve Balances (current and archived releases). Retrieved October 16, 2025, from https://www.federalreserve.gov/ (Federal Reserve)
[14] Federal Reserve Bank of St. Louis (FRED Blog). (2023, November 20). Federal Reserve remittances to the U.S. Treasury.https://fredblog.stlouisfed.org/ (FRED Blog)
[15] Board of Governors of the Federal Reserve System (via FRED). (n.d.). Liabilities & Capital: Earnings Remittances Due to the U.S. Treasury (RESPPLLOPNWW) (weekly series). Retrieved October 16, 2025, from https://fred.stlouisfed.org/series/RESPPLLOPNWW (FRED)
[16] Board of Governors of the Federal Reserve System. (2024, March 26). Federal Reserve Board releases annual audited financial statements (deferred-asset explanation). https://www.federalreserve.gov/ (Federal Reserve)
[17] Anderson, A., Ihrig, J., Kiley, M., & Ochoa, M. (2022, July 15). An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet (Part 2). Board of Governors of the Federal Reserve System, FEDS Notes. https://www.federalreserve.gov/ (Federal Reserve)
[19] U.S. Department of the Treasury, Fiscal Data. (n.d.). America’s Finance Guide: National Debt (dataset links and coverage notes—e.g., Debt to the Penny since 1993). Retrieved October 16, 2025, from https://fiscaldata.treasury.gov/ (Fiscal Data)
[20] Data.gov (U.S. General Services Administration). (n.d.). Debt to the Penny (dataset catalog entry and composition note). Retrieved October 16, 2025, from https://catalog.data.gov/ (Data.gov)
[22] U.S. Department of the Treasury, Fiscal Data. (n.d.). Historical Debt Outstanding (long-run series). Retrieved October 16, 2025, from https://fiscaldata.treasury.gov/ (Fiscal Data)
When it comes to the Federal budget, several terms are used and it is important to understand what they are in order to know how they are funded, and how they shape the overall Federal budget. So, if you are interested in understanding the Federal budget, understanding these terms is a must. Most federal spending fits into three categories. Understanding how and why these categories work can help you understand the Federal Budget process and what programs keep paying even during funding lapses, why others pause, and where most dollars are actually spent. They can also help you understand what constraints Congress is under, knowing each of these categories will help you understand how little discretion there is in the budget without legal changes. For a high level understanding of these three categories in FY2024: Mandatory Spending programs were a bit over $4.1 trillion (~60%), Discretionary Spending programs about $1.8 trillion (~26%), and Net Interest (i.e. interest paid on the National Debt) about $1.0 trillion (~14%), for roughly $6.8 trillion in total Federal outlays (spending). Net interest is shown as its own category in official presentations. [1][2][3]
What each Category Means
Mandatory Spending: This category of spending, as its name implies, is required by statute (law). Budget items in this category are automatically authorized for funding unless the law is changed. The statute (law) sets which programs are mandatory and the eligibility requirements and formulas for how much is authorized. Mandatory spending was about $4.1T in FY2024—roughly 60% of total outlays. [2][3]
Entitlements: This category is a subset of Mandatory Spending. Entitlements are Mandatory Spending programs that confer a legal right to benefits to citizens, for example: Social Security, Medicare, and Medicaid are Entitlements. Entitlements make up the bulk of Mandatory Spending; Social Security and Medicare alone account for more than half of mandatory outlays. [2]
Net Interest: The interest the U.S. pays on its National Debt. It’s authorized by permanent law (a permanent, indefinite appropriation) [4], which is why many sources describe it as “technically mandatory,” but it is shown as its own category in the budget, separate from both mandatory and discretionary. In FY2024 it was about $1.0 trillion (~14% of total outlays). [1][3]
Discretionary Spending: This is the remaining non-compulsory spending, everything Congress has not defined by statute (law). Short of changing the law on Mandatory Spending programs, this is the part of the budget Congress can adjust annually. Discretionary spending is just over one-quarter of total outlays (~26%). Congress decides discretionary levels each year during the Federal budget process in 12 separate appropriations bills produced by the Appropriations Committees. (See our Article on Federal Budget Process.) [1][5]
Figure 1: Federal Budget Categories FY 2024 Source: CBO
What’s inside each Category
Mandatory Spending
Programs
Description
Entitlement
FY 2024 Budget Amount
% of Total Federal Spending
Social Security (Old-Age, Survivors, and Disability)
Provides benefits to retired workers, the disabled, and their spouses, children, and survivors. Funded by payroll taxes.
Yes
$1.45T
21.4% [2]
Medicare
A federal health insurance program primarily for people age 65 or older and certain younger people with disabilities.
Yes
$0.9T
12.7% [2]
Medicaid and CHIP
A federal-state health care program for low-income and needy individuals, including children, pregnant women, the elderly, and people with disabilities.
Yes
$0.6T
9.1% [2]
Veterans’ disability compensation and pensions
Provides benefits to veterans who have a service-connected disability. Pensions are paid to low-income wartime veterans.
Yes
$0.2T
2.8%
Federal civilian and military retirement
Provides retirement benefits to federal government civilian employees and military personnel, including pensions, disability, and survivor benefits.
No
$0.2T
2.9%
Unemployment Insurance (federal share)
A joint federal-state program that provides temporary, partial wage replacement to unemployed workers.
Yes
$0.03T
0.5%
SNAP and other nutrition programs
Provides benefits to low-income households to supplement their food budgets. Other programs include school lunch, and food assistance for seniors.
The part of tax credits that can be paid as a refund.
Yes
$0.16T
2.4%
Affordable Care Act (a.k.a. Obamacare)
Provides tax credits and other subsidies to help eligible individuals and families afford health insurance.
Yes
$0.11T
1.6%
Farm programs (e.g., crop insurance subsidies)
Provides subsidies and other support to farmers and agricultural producers.
No
$0.03T
0.5%
Other Mandatory Programs
A collection of smaller, non-entitlement mandatory outlays not separately itemized, such as deposit insurance, payments for natural resources, and other government-wide programs.
No
$0.3T
4.1%
Subtotal Mandatory Spending
$4.1T
~60%
Net Interest
Program
Description
FY 2024 Budget Amount
% of Total Federal Spending
Net Interest
Debt Service – Interest payments on US National Debt
$1.0T
~14%
Discretionary Spending
Programs
Description
FY 2024 Budget Amount
% of Total Federal Spending
National Defense
Funds for the Department of Defense (military operations, personnel, weapons procurement, research), and other defense-related activities in other agencies.
$0.9T
~13% [1]
Health and Human Services
Discretionary funds for health research (e.g., NIH), public health, and human service programs, separate from Medicare and Medicaid entitlements.
$0.1T
~2%
Education
Provides funding for federal education initiatives, grants, and programs at all levels.
$0.1T
~1%
Transportation
Supports highway and airport construction, mass transit, and other infrastructure projects (note: highways/aviation have mandatory contract authority, but spend-out is shaped by annual limits).
$0.1T
~1%
Veterans’ Health Care
Funds health care services provided through the Veterans Health Administration (separate from mandatory disability compensation).
$0.1T
~2%
Homeland Security
Funds for agencies responsible for homeland security, including border patrol and immigration enforcement.
$0.06T
~1%
Housing & Urban Development
Public housing, community development, and housing assistance programs.
$0.06T
~1%
Energy & Environment
Department of Energy, Environmental Protection Agency, and other natural resource and environmental programs.
$0.06T
~1%
International Affairs
State Department, USAID, and foreign aid.
$0.06T
~1%
Other Discretionary
Various government agencies and programs, including general government administration, science, and space exploration (e.g., NASA/NSF).
$0.3T
~5%
Subtotal Discretionary
~$1.8T
~26%
Summary
Knowing Federal Budget terms is useful for understanding how and where Federal money is spent. In FY2024 the Federal Government spent ~$6.8 trillion and took in ~$4.9 trillion, with a deficit of ~$1.8 trillion. The majority of the spending goes to Mandatory programs, most of which are Entitlement programs providing services and benefits to citizens. Net interest—about $1.0T—is reported as its own category and paid under permanent law. As the Mandatory components grow, there is less room for Discretionary items that Congress can administer without reductions in mandatory spending, increases in tax revenue, or additional borrowing. When you look at discretionary spending, many people would consider those categories essential – Education, Environment, Transportation, National Defense – core services of government. Understanding these components clarifies the difficult trade-offs between fiscal sustainability and key government services. [1][2][3][4][5]
Citations
[1] Congressional Budget Office (CBO), The Federal Budget in Fiscal Year 2024: Infographic; and Discretionary Spending in FY2024: Infographic (discretionary ≈ $1.8T; composition; total outlays context). [2] CBO, Mandatory Spending in Fiscal Year 2024: An Infographic (mandatory ≈ $4.1T; Social Security + Medicare > half of mandatory). [3] CBO, Monthly Budget Review: Summary for Fiscal Year 2024 (total outlays ≈ $6.8T; net interest ≈ $0.95T, rounded to $1.0T). [4] 31 U.S.C. § 3123, Payment of obligations and interest on the public debt (interest paid under permanent, indefinite appropriation). [5] CBO primers on budget categories and the annual appropriations process (12 appropriations bills produced by the Appropriations Committees).
The future of the United States economy, and perhaps the equity between generations, presents an immense challenge and choice with how to manage fiscal responsibility for unfunded liabilities. The National Debt is a frequently discussed topic and people have a general awareness that it should be managed intuitively. By its very nature it is a common topic in the financial zeitgeist, much like the choppy white water on the ocean’s surface. Unfunded Liabilities though are like a hidden current beneath a calm surface, these commitments represent promises made today that lack a clear, fully funded pathway to fulfillment and are a less frequently discussed topic that may not gather attention. A segment that appeared on “60 Minutes” with Federal Reserve Chairman Jerome Powell discussed the economy and if the National Debt is a danger to the economy. Powell denoted that in the long run “the US is on an unsustainable fiscal path” and that we are “borrowing from future generations.” To be fair this question was related to the National Debt and does not even address Unfunded Liabilities which only compounds the challenge. This begs to question whether the current generation is making a “Faustian Bargain,” are we trading long-term societal health and prosperity for short-term comfort by deferring policy decisions.
To answer this question, we must first understand what unfunded liabilities are, their colossal scale, how they fit into the overall fiscal health of our country, and their implications for the future.
What are Unfunded Liabilities?
In simple terms, an unfunded liability is a future financial obligation for which there is no sufficient pre-existing asset or dedicated revenue stream. Unlike the national debt, which represents accumulated past borrowing, unfunded liabilities are projections of future shortfalls in programs the government is legally or morally committed to. These often involve long-term entitlement programs where the present value of future promised benefits far exceeds the present value of projected future revenues.
Main components of the U.S. Unfunded Liabilities:
• Social Security: The Old-Age and Survivors Insurance and Disability Insurance (OASDI) programs, which provide retirement, disability, and survivor benefits. • Medicare: The federal health insurance program for people 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (ESRD). This includes Hospital Insurance (Part A), Supplementary Medical Insurance (Part B), and Prescription Drug Coverage (Part D). • Federal Employee and Military Retirement Benefits: Pensions and other post-retirement benefits for civilian federal employees and military personnel. • Veterans’ Benefits: Compensation, pensions, healthcare, and other support for veterans and their families. These are not merely accounting entries; they represent promises made to millions of Americans—promises that, under current law and demographic projections, cannot be met without significant adjustments.
The Colossal Bill: Quantifying the Unfunded Commitments
The scale of these unfunded liabilities is staggering, dwarfing the already formidable national debt. The most comprehensive and authoritative source for these figures is the Financial Report of the United States Government, prepared annually by the U.S. Department of the Treasury in coordination with the Office of Management and Budget (OMB), and audited by the Government Accountability Office (GAO) [1]. It is crucial to note that these figures are typically presented as “present values” over a 75-year projection period, meaning future shortfalls are discounted to their equivalent value in today’s dollars.
As of the 2024 Financial Report of the United States Government (released February 2025) [1]:
• Total Social Insurance Net Expenditures (primarily Social Security and Medicare): This combined shortfall represents the largest portion of the nation’s unfunded liabilities. For Fiscal Year 2024, this amounted to approximately $78.3 trillion over a 75-year projection period [1]. This figure alone is more than twice the total annual Gross Domestic Product (GDP) of the entire U.S. economy.
Let’s break down the two giants within this category:
• Social Security (OASDI): The 2024 Social Security Trustees’ Report indicates an unfunded obligation of approximately $25.4 trillion over the 75-year projection period [2, 3]. Without legislative action, the Old-Age and Survivors Insurance (OASI) Trust Fund is projected to be able to pay 100 percent of scheduled benefits until 2033. After that, it will only be able to pay about 79 percent of scheduled benefits from continuing income [3].
• Medicare (Parts A, B, & D): Medicare’s unfunded liability is even larger. The 2024 Medicare Trustees’ Report projects an unfunded obligation of approximately $52.8 trillion over the 75-year period [1, 3]. The Hospital Insurance (HI) Trust Fund (Medicare Part A) is projected to be able to pay 100 percent of scheduled benefits until 2036, after which it will be able to pay about 89 percent [3]. Medicare’s financial challenges are exacerbated by rising healthcare costs and an aging population. Beyond these primary social insurance programs, other significant unfunded commitments contribute to the overall fiscal picture:
• Federal Employee and Veteran Benefits Payable: These represent accrued liabilities for pension and other post-retirement benefits for civilian federal employees and military personnel, as well as veterans’ compensation and burial benefits. The 2024 Financial Report of the United States Government reports $15.0 trillion for “Total Federal Employee and Veteran Benefits Payable” on the government’s balance sheet [4]. It is important to distinguish that this is a balance sheet liability, reflecting accrued benefits to date, rather than a 75-year actuarial projection of all future shortfalls like Social Security and Medicare. However, it still represents a significant long-term commitment that needs to be funded.
• Other Unfunded Plans and Liabilities: While less dramatic in scale compared to Social Security and Medicare, other programs carry unfunded aspects. Examples include certain aspects of Medicaid (a jointly funded federal-state program where federal mandates can create unfunded burdens on states), and some federal loan programs or insurance commitments where future payouts could exceed reserves. The concept of “unfunded mandates” on states, for instance, like those related to environmental regulations or disability access, effectively shifts federal obligations to local governments, creating their own set of fiscal challenges [5]. Due to the diverse nature of these obligations and the varied methods of accounting for them (ranging from spending projections to contingent liabilities or balance sheet entries), there isn’t a single, universally accepted, aggregated dollar amount for “Other Unfunded Plans and Liabilities” that directly compares to the 75-year present value projections for Social Security and Medicare. While they contribute to the nation’s broader fiscal challenges, the most authoritative reports primarily focus their explicit “unfunded liability” calculations (in terms of present value of future shortfalls over 75 years) on the major entitlement programs of Social Security and Medicare. When considering the total picture of long-term fiscal imbalance, beyond just Social Security and Medicare, some broader analyses, such as those from the Penn Wharton Budget Model, project an “infinite horizon fiscal imbalance” (covering all current and future generations) that could reach $162.7 trillion as of 2024 [6]. This figure underscores the true magnitude of the nation’s fiscal challenge.
Diagram 1 Source: US Treasury
Unfunded Liabilities in the Context of the National Debt
It’s crucial to understand the relationship between unfunded liabilities and the national debt. The national debt is the total accumulated outstanding borrowing by the U.S. Federal Government over the nation’s history. As of May 8, 2025, the U.S. national debt stands at approximately $36.21 trillion [7]. While the national debt is the sum of past deficits, unfunded liabilities represent promises for future spending that are not yet financed or due. However, they are deeply intertwined. As entitlement programs like Social Security and Medicare mature, their unfunded portions translate into increasing demands on the federal budget. When current revenues are insufficient to cover these mandated benefits, the government must either increase revenue by raising taxes, or borrow to make up the difference, thereby adding to the national debt. The national debt is the manifestation of yesterday’s unfunded promises and ongoing spending decisions. Unfunded liabilities are the future promises that, unless addressed, will become tomorrow’s addition to the national debt. This perpetual cycle creates a growing burden.
The Impact on Future Generations: A Faustian Bargain?
The profound question at the heart of this fiscal dilemma is whether current generations are making a “Faustian Bargain” with future generations.
Faustian Bargain: The term “Faustian Bargain” originates from the classic German legend of Faust, a scholar who, disillusioned with the limits of human knowledge, makes a pact with the demon Mephistopheles (i.e., Deal with the Devil). In exchange for limitless knowledge, worldly pleasures, and power for a set period, Faust agrees to surrender his soul to the devil. The essence of a Faustian bargain is a trade-off: an immediate, often enticing benefit or power, at the cost of something valuable, often an intangible, moral, or spiritual value eventually. The bargainer often recognizes the malevolent nature of the deal and its ultimately tragic or self-defeating outcome [8].
Answering the Question?
Are current generations, by failing to address the growing unfunded liabilities, effectively making a Faustian bargain? The “immediate benefit” is the continued receipt of promised Social Security, Medicare, Pensions, and other benefits to current generations without politically painful reforms and in essence transferring that burden to future generations. So unlike Faust who received the benefit and had to deal with the consequence, the current generation will receive the benefit without the consequence. Meaning the current generation can pass the consequences on by doing nothing.
Americans should expect promises made to be kept, and short falls in funding are a recurring no fault event. However, if the goal is to promote long term health and prosperity than something should be done. Politicians aren’t motivated to push to address this political third rail that would involve either raising taxes, cutting spending, reducing benefits, raising eligibility ages or likely a combination of these. So much like the song Freewill by the band Rush, “If you choose not to decide, you still have made a choice.” By doing nothing, the current generation is passing this burden on.
What happens if we don’t address?
This may be more of a moral dilemma than fiscal question as the fiscal health and economic opportunity of future generations is at stake with the most severe impact on future generations. If unchecked, the escalating unfunded liabilities will lead to:
• Higher Taxes: Future generations will likely face higher taxes to cover these mounting obligations. This could stifle economic growth, reduce disposable income, and limit their ability to save and invest. • Reduced Government Services: As a greater portion of the budget is consumed by mandatory entitlement spending (making up large portions of the unfunded liabilities) and interest on the debt, less funding will be available for other crucial public services like education, infrastructure, research and development, and national defense—investments that are vital for future prosperity and competitiveness. • Slower Economic Growth: High levels of public debt and unsustainable entitlement programs can crowd out private investment, and lead to slower overall economic growth. This means future generations will inherit a less dynamic economy with fewer opportunities. • Intergenerational Inequity: The burden is disproportionately shifted to younger and future generations, who will pay into systems that may offer them fewer benefits than the US is currently providing. This raises fundamental questions about fairness and the social contract between generations. • Reduced Fiscal Flexibility: The government’s ability to respond to unforeseen crises (economic downturns, pandemics, wars) will be severely constrained if a large portion of its budget is already locked into mandatory spending and debt service. How can this be addressed? In short, not very easily. The pathway to addressing would likely require a combination of policy choices that include: • Reforming Entitlement Programs: This could involve adjusting eligibility ages, modifying benefit formulas, introducing means-testing, or reducing benefits for programs like Social Security and Medicare. • Controlling Healthcare Costs: Addressing the underlying drivers of healthcare inflation is critical for the long-term solvency of Medicare. Finding efficiencies will mitigate the risk. • Increased Revenue: This might involve tax increases and must be balanced carefully to consider the impact on economic growth. • Economic Growth: A stronger economy generates more tax revenue and helps to manage debt more effectively. Economic growth will ease fiscal challenges across the board.
What is the Cost?
The 2024 Financial Report of the U.S. Government highlights a “75-Year Fiscal Gap” of 4.3% of GDP [1]. This means there is a short fall in revenue to fund programs that will require some combination of reduced spending, reduction in services, higher taxes, and hopefully some higher revenue due to growth. To truly grasp the magnitude of this challenge, let’s contextualize and estimate per citizen in Table 1. Using a rough estimation if we apply that 4.3% gap to a 40 hour working week you get about 1.72 hours a week of extra contributions needed to pay for the gap.
Program
Cost
Cost per Citizen
Social Security (OASDI)
$25.4 Trillion
$76 Thousand
“Medicare (Parts A, B, & D)”
$52.8 Trillion
$157 Thousand
Federal Employee & Veteran Benefits
$15 Trillion
$44 Thousand
Other Unfunded Liabilities
?
?
Total
$93.2 Trillion
$277 Thousand
Table 1
Conclusion
It is right to be skeptical of 75 year government estimates, and a lot can happen and change in that period. However, the challenges are very real and will ultimately manifest themselves in unpleasant ways unless acted upon. Like the seemingly harmless slow drip of water that over time can be tremendously powerful carving canyons and moving mountains. The moral dilemma of addressing the issue head on or pushing it to another generation will present difficult choices for citizens and leaders. The solutions will likely require making tough trade offs and sacrifices. The Faustian Bargain of immediate gratification and deferring tough choices shifts the primary cost, long-term well-being and opportunities on to future generations. Ignoring this challenge today has ethical and economic ramifications that will resonate for decades.
The challenge is immense, but not insurmountable. The question is whether today’s leaders and citizens possess the foresight, will, and courage to confront these head-on, or if we continue to make a Faustian bargain, leaving future generations to pay the price. The choices we make today will define the economic destiny and intergenerational equity of tomorrow.
References
[1] Treasury: 2024 Financial Report of the United States Government. https://fiscal.treasury.gov/files/reports-statements/financial-report/2024/full-financial-report.pdf [2] Social Security Administration (SSA): 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. https://www.ssa.gov/oact/tr/2024 [3] U.S. Department of the Treasury: Fact Sheet: 2024 Social Security and Medicare Trustees Reports. https://home.treasury.gov/system/files/136/TR-2024-Fact-Sheet.pdf [4] Treasury: Note 13. Federal Employee and Veteran Benefits Payable from the 2024 Financial Report of the United States Government notes section. https://fiscal.treasury.gov/files/reports-statements/financial-report/2024/notes-to-the-financial-statements13.pdf [5] Wikipedia: Unfunded Mandate https://en.wikipedia.org/wiki/Unfunded_mandate [6] Penn Wharton Budget Model: Complete Measures of U.S. National Debt. https://budgetmodel.wharton.upenn.edu/issues/2025/1/27/complete-measures-of-us-national-debt [7] Treasury: Understanding the National Debt. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/ [8] Britannica: Faustian bargain. https://www.britannica.com/topic/Faustian-bargain [9] United States Census Bureau: U.S. and World Population Clock. https://www.census.gov/popclock/
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