Japan · U.S. Treasury · Fortune Technology
Here’s where U.S. debt may become unsustainable with interest payments triggering a default crisis that even steep tax hikes
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Soaring U.S. debt and projections that put it at astronomical levels in the coming years have set off increasing panic, though the precise level that sparks a crisis is unknown.
Key facts
- The debt-to-GDP ratio is about 100% today, and forecasts from the Congressional Budget Office see it hitting 175% by 2056—suggesting 210% is decades away on its current trajectory
- The U.S. has 25 more years in a lower-growth scenario, 22 years with medium growth, and 19 years with higher growth, PWBM estimated
- Under the historical growth rate of healthcare costs, there is a 25% chance of hitting the debt maximum in 14 years,” it added
- The expected insolvency of the Social Security and Medicare trust funds by 2034 will serve as a catalyst, Bernard Yaros, lead U.S. economist at Oxford Economics, said in a note last year
Summary
But the Penn Wharton Budget Model may have an answer: more than 210% of GDP. Above that “outer bound” threshold, there’s no feasible tax on labor income that can finance interest payments on U.S. debt at returns acceptable to investors, PWBM warned in a report Thursday. According to PWBM, the outer bound of federal debt is the solvency limit, beyond which defaulting on either Treasury debt or pay-as-you-go transfers like Social Security becomes a near certainty on an inflation-adjusted basis. The debt-to-GDP ratio is about 100% today, and forecasts from the Congressional Budget Office see it hitting 175% by 2056—suggesting 210% is decades away on its current trajectory.