US heading towards economic ‘heart attack’ if debt is not cut soon:
World’s largest hedge fund founder Ray Dalio told David Friedberg of ‘The All-In Podcast’ that politicians must have ‘unified agreement’ to stop ‘death spiral’
The United States is currently in a “death spiral” of debt that could lead to an economic “heart attack” if both parties do not work together to start cutting immediately, according to Ray Dalio, the founder of the world’s largest hedge fund.
During a recent conversation on “The All-In Podcast” with co-host David Friedberg, Dalio noted that a “death spiral” typically refers to when a company or government has too much debt and must borrow to service it. According to Dalio, investors are acutely aware of this, which is causing credit to get worse and interest rates to increase.
Dalio, the founder of Bridgewater Associates, says this is the worst thing that can happen to a heavily indebted entity. He notes that the key question is whether the debt creates a large enough income to mitigate this issue.
“That’s like, I don’t know, eating vegetables or something. It’s a healthy process. And if not, credit begins to build up this debt, it begins to become like plaque in the arteries. And you can measure it just like you could measure it in the arteries, and you can see how it constricts that circulatory system,” Dalio told “All-In.”
If interest and debt service continuously constrict a government’s money supply, Dalio claims this can lead to an “economic debt heart attack.”
A large amount of debt creates the need for somebody to buy it. Debt risks not only create the urgency for new supply to be offered, but holders may also sell those debt assets, leading to an overwhelming supply relative to demand, according to Dalio.
In the event that the debt service burden rises or there is a big supply-demand imbalance, the government’s central bank can print more money and buy it. If they do not, the price of the debt must rise to constrict borrowing, snowballing to the constriction of non-existent credit, in turn weakening the economy and causing bad economic conditions.
Dalio says the government can let that happen or print money and buy the debt to monetize it. However, this will cause inflation and lower the value of the debt.
“In either case, you don’t want to hold that debt because either there’s a debt service problem or there’s a depreciation,” he adds.
Today, the U.S. has $36.4 trillion of federal government debt and a Gross Domestic Product (GDP) of 29.1 trillion, giving a debt-to-GDP ratio of 125%. This ratio has climbed steadily since the pandemic began in 2020, when the federal government debt was $20 trillion, and GDP was just $21 trillion. Since the pandemic, federal government debt has risen by 80%, while GDP has climbed by 38%.
Despite recent efforts to cut interest rates again, markets have traded treasuries down, causing the long-term interest rates of U.S. debt to spike up to levels not felt since just before the 2008 global financial crisis. To keep the economy growing, the U.S. government is running a nearly $2 trillion annual deficit, nearly 7% of GDP, while paying over $1 trillion per year in interest alone on the existing outstanding debt.
Dalio expressed a sense of urgency in relation to mounting debt, wading into the potential benefits of the Department of Government Efficiency (DOGE) and how the need to cut costs will inevitably accentuate already entrenched political divisions.
Touting his personal solution, Dalio said the deficit, which is the equivalent of bonds selling, must be cut from 7.5 percent down to 3 percent of GDP.
Congress is racing to execute the recommendations of Trump’s new DOGE commission. (Getty Images)
“Different people have different views as to how to cut it. Forget it. I don’t really care,” Dalio said. “Just, you have to have a unified agreement. Everybody in Congress and the president and so on should pledge to do that. And then the question is how to do it. But they should know that number (equivalent to around 900 billion a year).
Dalio worries that the timeline to close this gap may be too long. He says it’s not just a matter of DOGE but also less regulation and productivity changes, which could, in part, come from artificial intelligence (AI) or even revenue produced by tariffs and translate into profit.
When asked if America is better off with President Donald Trump versus former President Biden in the financial context, Dalio said, “Yes, I do believe we are.”
“In terms of profitability and the likelihood of cutting, I think the Republicans are probably more likely to make these moves than the Democrats. But you also have to take into consideration the impacts, the social impacts and the other impacts that are going to come from this. We’re at a civil war internally and we’re at an international war simultaneously. So, there are second-order effects. I think the main thing is to take those numbers and make them real at 3 percent,” he continued.
But these cuts will be brutal, according to Dalio. He notes that “how the pie is divided” with respect to government budgeting is going to be very political and the “disruptive effects will be enormous.”
“We’re really all guessing on how disruptive those effects will be. It’s too much of a – but you’re absolutely right. Lots of jobs are going to be lost,” he said. “Lots of change is going to happen in terms of turbulence. And do we have a plan? How could we even agree on a plan of how to deal with that? I don’t think we’re in a time, it may be in the rest of our lifetimes, where that agreement is going to be easy.”
The Economic Policy Innovation Center (EPIC) released a new model in December that said it is “possible” that the U.S. government would exhaust the ability to pay its debts by June 16, 2025.
“The government is projected to run about a $2 trillion deficit next year. And so that means that the spending obligations that Congress and the government have incurred are a lot more than what we’re going to bring in tax revenues,” Matthew Dickerson, director of Budget Policy at EPIC, told Fox News Digital. “To be able to pay the things the government has promised to pay on time, you need to increase the debt limit.”
In what would be a CFO’s worst nightmare, the Department of Defense (DoD) has failed its seventh audit in a row since its first in 2018. While the consequences of audit failures have caused major issues for private businesses, the country’s largest government agency, which has a 2024 budget of $824 billion — a $26.8 billion increase from 2023 — has been given until 2028 to account for its spending. In the latest audit of the 28 reporting entities audited within the DoD:
Nine received an unmodified opinion
Fifteen received disclaimers
One received a qualified opinion
Three opinions remain pending
Of the 15 disclaimers, insufficient information about the accounts was the primary reason. The agency is walking a fine line under federal law, as the CFO Act of 1990 requires all federal agencies in the executive branch to prepare auditable financial statements and undergo audits.
It’s possible that continued financial disarray could undermine public confidence and affect the department’s ability to allocate resources effectively, potentially impacting U.S. military readiness. During a press conference last week, Michael McCord, the DoD comptroller and CFO, acknowledged public concerns about his team’s challenges but said progress toward the 2028 goal is improving.
“This result was not a surprise, and I know that on the surface it doesn’t sound like we’re making progress. However, that is not the case,” said McCord. “I believe the department has turned a corner in its understanding of the challenges and more importantly, in addressing those challenges, momentum is on our side.”
The DoD’s fiscal performance is an outlier. Most federal agencies, excluding the DoD and the Department of Education, comply with the CFO Act and receive clean or qualified opinions in their audits. Critics argue the DoD’s vast and complex financial system contributes to these challenges. Still, a lack of accountability also raises concerns about the department’s capacity to manage such a substantial portion of the federal budget.
U.S. fiscal spending 2024
The federal government’s fiscal year runs from Oct. 1 to Sept. 30. Not listed is a line item of “other” totaling $311,000,000,000.
Social Security
$1,460,000,000,000
Healthcare
$912,000,000,000
Net interest payments
$882,000,000,000
*National defense
$874,000,000,000
Income security
$671,000,000,000
Veteran’s benefits and services
$325,000,000,000
Education
$305,000,000,000
Transportation
$137,000,000,000
*This figure is higher than the DoD’s budget because it encompasses things like overseas contingency operations and defense-related spending in other federal departments.
Though the CFO Act does not require an unmodified opinion from an audit, the DoD, whose spending is surpassed only by Social Security, healthcare and net interest on the national debt, has been given a timetable of fewer than four more years by Congress to secure an unmodified audit opinion by fiscal 2028. Currently, the Pentagon’s success rate is 32%.
Failure to meet the 2028 deadline could have serious consequences, including intensified congressional oversight, reduced discretionary spending or stricter budgetary controls on defense allocations. Even areas of the DoD’s audit spending could come into question, as the latest audit was conducted by teams of independent public accountants and the Office of Inspector General within the DoD and cost taxpayers a whopping $178 million.
As President-elect Donald Trump and his administration push to promote efficiency within federal jobs while reducing government spending, the DoD’s slow progress toward financial accountability may face increased scrutiny by the chief executive and his team, as well as within future budget allocation decisions by Congress if they begin factoring in financial decision-making and fiscal responsibility to budget approvals.
The Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs each year. This document summarizes the findings of the 2024 reports. As in prior years, we found that the Social Security and Medicare programs both continue to face significant financing issues.
Based on our best estimates, this year’s reports show that:
• The Old-Age and Survivors Insurance (Social Security) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year’s report. At that time, the fund’s reserves will become depleted and continuing program income will be sufficient to pay 79 percent of scheduled benefits.
• The Disability Insurance (DI) Trust Fund is projected to be able to pay 100 percent of total scheduled benefits through at least 2098, the last year of this report’s projection period. Last year’s report projected that the DI Trust Fund would be able to pay scheduled benefits through at least 2097, the last year of that report’s projection period.
• If the OASI Trust Fund and the DI Trust Fund projections are combined, the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2035, one year later than reported last year. At that time, the projected fund’s reserves will become depleted and continuing total fund income will be sufficient to pay 83 percent of scheduled benefits. (The two funds could not actually be combined unless there were a change in the law, but the combined projection of the two funds is frequently used to indicate the overall status of the Social Security program.)
• The Hospital Insurance (Medicare) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2036, 5 years later than reported last year. At that point, that fund’s reserves will become depleted and continuing program income will be sufficient to pay 89 percent of total scheduled benefits.
• The Supplemental Medical Insurance (SMI) Trust Fund is adequately financed into the indefinite future because, unlike the other trust funds, its main financing sources–enrolled beneficiary premiums and the associated federal contributions from the Treasury–are automatically adjusted each year to cover costs for the upcoming year. Although the financing is assured, the rapidly rising SMI costs have been placing steadily increasing demands on beneficiaries and general taxpayers.
The projected long-term finances of the combined OASDI fund improved this year primarily due to an upward revision to the level of labor productivity over the projection period and a lower assumed long-term disability incidence rate. These improvements were partially offset by a decrease in the assumed long-term total fertility rate. The revision to labor productivity was based on stronger economic growth in 2023 than had been anticipated in last year’s reports. The Trustees lowered the long-term disability incidence and fertility rate assumptions based on continued low levels in both series.
The projected long-term finances of the HI Trust Fund also improved this year relative to last. This improvement was due to several factors, including a policy change correcting for the way medical education expenses are accounted for in Medicare Advantage rates starting in 2024, higher payroll tax income resulting from the stronger-than-expected economy, and actual 2023 expenditures that were lower than projected last year.
The change in the projected long-term finances of the SMI Trust Fund from last year’s report varies over the projection period. For Part B, the long-range projections as a percent of GDP are lower than those projected last year through 2056 and higher thereafter. This change reflects the combined effects of lower projected spending for outpatient hospital and home health agency services and revised GDP projections. For Part D, the expenditure share of GDP is projected to be higher than last year early in the projection period and to continue to vary but become more similar to last year’s estimates later in the projection period. These changes largely reflect revisions to drug utilization, enrollment, and GDP projections.
Lawmakers have many options for changes that would reduce or eliminate the long-term financing shortfalls. Acting sooner rather than later will allow consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.
2024 ANNUAL SOCIAL SECURITY AND MEDICARE TRUST FUND REPORTS SUMMARY
Key Findings of the 2024 Trustees Reports Social Security
Medicare
Old-Age and Survivors Insurance (OASI)
Disability Insurance (DI)
Hospital Insurance (HI)
Supplementary Medical Insurance (SMI)
Types of benefits paid from the trust fund
Retirement and survivor benefits
Disability benefits
Inpatient hospital and post-acute care (Part A)
Physician and outpatient care (Part B), and prescription drugs (Part D)
Full scheduled benefits are expected to be payable until
2033
2098
2036
Indefinitely
Percentage of scheduled benefits payable at time of reserve depletion
Centrist parties of the left and right came together 30 years ago to save pensions from insolvency.
By Johan Norberg | Feb. 22, 2023 12:54 pm ET
‘There are few issues on which Sweden and the United States are not in perfect sync,” then-Vice President Joe Biden said here in 2016. Here’s one: Social Security. President Biden refuses to consider any reforms, and so do many Republicans. But that won’t save the program; it’ll doom it. In a little over a decade, the trust fund will be exhausted.
Sweden faced the same problem in the early 1990s. The old pay-as-you-go pension system had promised too much. With fewer births and longer lives, projections showed the system would be insolvent a decade later. As Mr. Biden has said in another context, Sweden has “an ethic of decency.” Its politicians chose not to deceive the voters. The center-left Social Democrats acknowledged that the system “would not withstand the stresses that can be foreseen.”
In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system based on the principle that pensions should correspond to what the beneficiary pays into the system—a system in which the contribution, not the benefits, is defined.
The reforms were designed to make it impossible to run a deficit and pass the costs to future generations. Crucially, the agreement introduced a balancing mechanism nicknamed “the brake.” When the economy is doing worse than expected, pension benefits are automatically reduced, and when the economy picks up again, the brake is released.
Sweden introduced partial privatization of the kind the American left derides as a Republican plot to gamble our money away on the stock market. The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts. Workers are allowed to choose up to five different funds in which to invest this money, according to their own risk preference, and can change them at any time free.
Commentators claim partial privatization would mean that pensions could be lost in a financial crash. That ignores that the money isn’t all invested or withdrawn at the same time, meaning that the performance in a single year isn’t crucial. The returns from the normal income pension is around 2% per year, but from the private accounts the average Swede has made an impressive average return of roughly 10% a year since its inception in 1995, despite the dot-com crash, the financial crisis and the pandemic.
Swedish social security isn’t perfect and doesn’t satisfy everyone, but it has the obvious advantage that it actually works and is sustainable in the long run. Far from being a cautionary tale, Sweden’s pension system was recently described as the world’s best by the insurance group Allianz, based on a combination of sustainability and adequacy.
The Swedish far left and far right never accepted the reform and have demanded and sometimes won higher payouts. But most of the system remains intact after almost 30 years. No doubt, part of the explanation is that Swedish politicians prepared their citizens with an adult conversation about costs, benefits and what was possible, instead of merely rehearsing slogans and ignoring the inevitable crash.
The Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs each year. This document summarizes the findings of the 2023 reports. As in prior years, we found that the Social Security and Medicare programs both continue to face significant financing issues.
Based on our best estimates, this year’s reports show that:
• The Hospital Insurance (HI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2031, three years later than reported last year. At that point, the fund’s reserves will become depleted and continuing program income will be sufficient to pay 89 percent of total scheduled benefits.
• The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, one year earlier than reported last year. At that time, the fund’s reserves will become depleted and continuing program income will be sufficient to pay 77 percent of scheduled benefits.
• The Disability Insurance (DI) Trust Fund is projected to be able to pay 100 percent of total scheduled benefits through at least 2097, the last year of this report’s projection period. By comparison, last year’s report projected that the DI Trust Fund would be able to pay scheduled benefits through at least 2096, the last year of that report’s projection period.
• If the OASI Trust Fund and the DI Trust Fund projections are added together, the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2034, one year earlier than reported last year. At that time, the projected fund’s reserves will become depleted and continuing total fund income will be sufficient to pay 80 percent of scheduled benefits. (The two funds could not actually be combined unless there were a change in the law, but the combined projection of the two funds is frequently used to indicate the overall status of the Social Security program.)
• The Supplemental Medical Insurance (SMI) Trust Fund is adequately financed into the indefinite future because, unlike the other trust funds, its main financing sources–premiums on enrolled beneficiaries and federal contributions from the Treasury–are automatically adjusted each year to cover costs for the upcoming year. Although the financing is assured, the rapidly rising SMI costs have been steadily increasing demands on beneficiaries and general taxpayers.
Since last year’s reports, projected long-term finances of the OASI and the OASDI Trust Funds worsened due to the Trustees revising down the expected levels of gross domestic product (GDP) and labor productivity by about 3 percent over the projection window. The Trustees made this change as they reassessed their expectations for the economy in light of recent developments, including updated data on inflation and U.S. economic output.
Despite the downward revision to economic assumptions, the projected long-term finances of the HI Trust Fund improved since last year’s report. The improvement is mainly due to lower projected health-care spending stemming from updated analysis that uses more recent data.
SMI Trust Fund expenditures for Medicare Part B as a share of GDP are also projected to be lower than previously estimated in part for the same reason. In addition, expenditures on drugs under SMI in Medicare Parts B and D are projected to be markedly lower as a share of GDP due to the impact of provisions of the Inflation Reduction Act, which became law in August 2022.
Lawmakers have many options for changes that would reduce or eliminate the long-term financing shortfalls. We urge Congress to consider such options for both Medicare and Social Security, like the proposal for Medicare in the President’s FY24 Budget. With each year that lawmakers do not act, the public has less time to prepare for the changes.
A SUMMARY OF THE 2023 ANNUAL SOCIAL SECURITY AND MEDICARE TRUST FUND REPORTS
Table 1 lists the 2023 Trustees Reports’ key findings for each of the separate trust funds established under the law.
Table 1: Key Findings of the 2023 Trustees Reports
