A reader asks:
Will the budget deficit cause the U.S. to go bankrupt in the next 10 years? If so, what would happen?
The Federal Government was already more than $10 trillion in debt in September 2008, and is currently at $11.2 trillion. President Obama's FY 2009 budget deficit will add $1.7 trillion, and another $1.17 trillion in FY 2010. That means the debt could be as high as $14 trillion by 2010. However, the U.S. has many options to prevent bankruptcy.
The U.S. government is increasing the debt levels to spur the economy out of the worst recession since 1982. It is financed by sale of U.S. Treasury bonds, which are still relatively safe investments for foreign buyers such as China and the Japan.
The U.S. debt level is currently at 70% of GDP, and 90% of GDP by 2010. This is high for an industrialized country, although lower than Japan's debt to GDP ratio of 170%. Although this is not a healthy situation for the U.S. economy, deficit spending is needed to stimulate the economy out of recession. By 2010, the economy is expected to return to normal growth rates.
However, budget deficits are still projected at $500 billion per year. This is to pay for mandatory programs such as Social Security and Medicare.
The non-partisan Government Accountability Office recently reported the government needs an additional $53 trillion to pay for all promised benefits in these programs. Obviously, this isn't possible. Instead, the Government will probably cut back on benefits rather than go bankrupt.
What It Means to You
High debt levels will ultimately lead to slower economic growth. The Treasury may need to raise yields to encourage continued purchasing of Treasury bonds. This means higher interest rates on down the road.
Reduced Social Security benefits translates to less government support for your retirement. It's best to plan now for part-time work after you turn 65. Focus on living healthily to make sure you can still work in your older years, as Medicare benefits will probably also be reduced.