Foreign media reports that the US fiscal situation is facing a clearer timeline. Kent Smetters, head of budget modeling at the Wharton School of the University of Pennsylvania, believes that if healthcare and retirement-related spending continue to grow at past trends, the US federal debt could approach its affordability limit within the next 20 years, and financial markets may react even before that.
The US debt ceiling is estimated at 210% of GDP.
In his latest analysis, Smetters argues that if the U.S. federal debt rises to approximately 210% of GDP, it will be difficult for the government to cover interest costs through broad income tax rates. He emphasizes that this is not a projection, but rather an external ceiling to fiscal sustainability.
According to the Wharton School's budget model, if healthcare costs continue to outpace overall economic growth, the US could reach this ceiling in about 20 years, with a one-in-four chance it could happen within 14 years. The model's median "closing-off year" is as early as 2045, with a more optimistic scenario around 2051.
He believes the market currently assumes Congress will eventually take measures to stabilize the budget, but this confidence is not unlimited. Once investors lose faith that the US can fix its fiscal path, market volatility may arrive before the mathematical limit is reached.
The proportion of expenditures related to the elderly remains high.
Smetters points to the skewed spending of the U.S. Treasury towards the elderly. He states that per capita spending on the elderly in the U.S. is about 10 times that of young people, and on a total basis, it is about 6 times that of the latter.
The Penn Wharton budget model estimated in April that retirees aged 65 and older would receive approximately $2.7 trillion in federal spending, representing 38.6% of total spending and 61.9% of age-allocated spending. In comparison, spending for those aged 26 to 64 would be approximately $1.2 trillion, and for those under 26, approximately $449 billion.
He argues that the American political system provides an incentive to defer the bill to the next generation, thus postponing fiscal adjustments indefinitely. This structural pressure is likely to become more pronounced as the baby boomers gradually leave the economic and political arena.
Social security funds may come under pressure in the early 2030s.
Smetters also mentioned that the U.S. Social Security system's Old Age Welfare Trust Fund may run out in the early 2030s. He said that his team's earlier assessment that income would be insufficient to cover welfare expenditures, with the main fund expected to bottom out around 2032, was later confirmed by official trustee reports and the Congressional Budget Office.
According to his estimates, once the trust fund is depleted, the program will only be able to pay about 83% of the promised benefits, and this percentage will continue to decline. However, he does not believe that this point in time is sufficient to force Washington to act quickly.
AI growth alone cannot resolve the deficit.
Smetters holds reservations about the view that "AI-driven growth can alleviate fiscal pressure." He believes that even if AI brings higher growth, government spending may also increase accordingly, and it cannot be simply interpreted as the expansion of the tax base being sufficient to offset the fiscal gap.
He also proposed a more radical approach: eliminating tax breaks for 401(k) and 403(b) contributions and redirecting that fiscal space to non-contributory retirement accounts for low-income workers. He previously estimated that such tax breaks would result in a fiscal revenue loss of approximately $1.3 trillion to $1.4 trillion over 10 years.
The market may issue warnings before the limits are reached.
Smetters believes the real risks may not occur when debt peaks, but rather at an earlier stage. He cites the fiscal crisis during the tenure of former British Prime Minister Truss as an example, suggesting the US may face similar market constraints within the next 5 to 10 years.
His reasoning is that once debt enters a high range, even if it hasn't reached the theoretical limit, changes in investor expectations could drive up financing costs and even trigger refinancing difficulties. According to him, the consequences of fiscal disorder will not only be limited to the bond market but could also further impact political and social stability.
