U.S. social programs must be reformed, says report

The U.S. government must increase the country’s legal debt ceiling for the thirteenth time since 2002 by next week.

Both the shutdown and debt ceiling problems have been caused by the explosion of mandatory spending related to social programs, which can’t be offset in the long run by tax increases, according to a paper published today by the Montreal Economic Institute (it’s entitled Viewpoint on U.S. Government Finances).

Read: What clients find on Google: U.S. debt ceiling

The group notes that successive budget deficits, even in good times, have had the effect of causing the American debt to increase substantially, from 49.3% to 72.6% of GDP over the past twenty years.

For Germain Belzile, economist and coauthor of the paper, increasing taxes to balance its finances is just a short-term solution. For example, creating a 5% sales tax, like the GST in Canada, would only cover supplementary spending for a dozen years.

Further, that tax would need to be continually raised, up to 15% by 2035.

The projections of the Congressional Budget Office show that the current situation is not an exceptional one due to the economic crisis, but instead is the result of a structural problem, adds the report.

“These past 20 years, mandatory spending has risen nearly twice as fast as U.S. GDP, which is an unsustainable rate,” says Jean-François Minardi, economist at the MEI.

“In their current forms, Medicare, Medicaid and Social Security will make balancing the budget more and more difficult in the future,” he adds. “The unsustainable increases in government spending must therefore be tackled by undertaking a deep reform of American social programs.”

Read:

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.