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The One Big Beautiful Bill Act (OBBBA) is enormous and its expected implementation is still largely being decided and analyzed. The new bill is a mishmash of policy priorities for the border, energy policy, defense, and more. All of it was stuffed like foie gras into the form of a single spending reconciliation bill. But make no mistake, there is a clarity of purpose here.
Although it was forced to be a Frankenstein bill to not leave anything out, the core of this new law is a capstone gift to a subset of Americans who may fear the credit card is about to be cancelled.
Despite low constituent support and loud protests, many Americans who claim that they don’t want or condone the new bill will still reap significant benefits. The decision has been made primarily for the benefit of the oldest Americans by their peers in Congress. Our current gerontocracy* hasn’t yet found a limit for their largesse.
This bill is the final cash grab. The last hand in the cookie jar before the lid gets slammed shut by the forced austerity of ballooning interest payments and the coming shortfalls of our cherished senior entitlements.
Our older generations have been accused for years of pulling the ladder up behind them and pillaging the economy for personal benefit. If it wasn’t true before, it unfortunately proves true now. This policy is plainly extractionary. How can it be viewed otherwise, when we continue to run up massive deficits without a war or recession in sight?
Mortgaging the future
The growth of the deficit from this single bill equals $4.1T - $5.5T depending on whether temporary provisions are made permanent down the line. In other terms, that is equal to 1.3-1.8 Iraq Wars**.
You won’t hear me preaching Modern Monetary Theory, but to be clear, sovereign debt isn’t always a problem. The fact we have debt is not in and of itself problematic, but the pace and circumstances in which we add it is now concerning. Debt as a percent of GDP will reach 127% (130% if all provisions are permanent) by 2034, and the annual deficits will run over 7% of GDP annually.
Critically, this is assuming that our current rate of GDP growth is sustained. After 15 years without a recession, we are banking on continuing that trend indefinitely to make these numbers as rosy as they are. In the case of recessions, deficits rise sharply and for good reason. Tax receipts fall but spending doesn’t stop. In fact, it usually increases to support the economy. Supporting the economy and the unemployed workers who suffer is one of the primary tools of speeding up a recovery when our economy is nearly 70% consumer-based.
In the past, Congress has seen the writing on the wall far long before this point. In an analysis by the Brookings Institute, the way Congress has responded to forecasts of budget deficits today is a gross departure from decades past. See below:
From 1984-2003, there was a positive correlation between deficit projections and Congressional deficit reduction. No more. There is now a negative correlation! As deficits grow, Congress has doubled down with further increases to deficits. It is this attitude that is unsustainable and will lead to weakened financial and global standing.
The authors of the Brookings study write of the post-2004 period, “Year-to-year feedback has disappeared.” Concerningly, they conclude that “[w]e once had government that was responsive to this problem in both Republican and Democratic administrations and we don’t now, in both Republican and Democratic administrations.”
The Social Security and Medicare impact
The last 10 years of policy promises not only lavished charity on the current crop of generally wealthier, older households in the form of lower taxes, larger deductions and exemptions, and huge spending packages. It also accelerated the deterioration of Social Security, Medicare, and Medicaid in order to juice the returns for those receiving it at the expense of those who hope to receive it in the future.
The OBBBA didn’t start this trend, but it continues it with zeal. Who can forget the 2017 Tax Cuts and Jobs Act that the OBBBA is the sequel to? In addition, the SECURE Act 2.0, completed by President Joe Biden, offered those aged 60-63 the ability to defer more money for retirement. On top of the normal catch-up contribution ($7,500), the lucky few can add an additional $3,750 to their 401(k)s for a total possible withholding of $34,750. This is only one of the many adjustments made to ease the burden on wealthy retirees.
President Biden also presided over the end of the Windfall Elimination Provision. This rule stood for 41 years and limited the Social Security benefits for individuals who also receive a pension from work where they didn't pay Social Security taxes. This was a boon for those who received it, but increases the drain on the Social Security fund and accelerates its deterioration.
As a former financial advisor who is gleefully pro-savings and pro-retirement planning, these should and would be exciting for my former clients. But not at the expense of the country’s finances. The poverty level is higher for American children than retirees, and we will expand this gap further by making these horrible financial trades.
As vocal as many Millennials and Gen Zers are about the perceived inadequacies of the current economy, it is Gen X who may face the starkest impact with the least time to prepare. Based on the Committee for a Responsible Federal Budget (CRFB) analysis, the law accelerates the shortfalls for Social Security and Medicare to the year 2032. That’s exactly when the oldest Gen Xers will hit full retirement age.
A quick word on Medicaid
Medicaid is a healthcare benefit, so it is not the same as the other programs. But, as a program that is viewed with suspicion by Republican leadership and disproportionately covers younger Americans, it has been a target of cuts for years. As of 2023, 44% of recipients are under 19, 48% are 19-64, and 8% are over 65. Being 65 or over is one of the exemptions from the new work requirements which will take effect in 2027. This policy will hit rural voters very hard.
Note: I am not a healthcare expert but I know one very closely and she isn’t impressed with this policy, saying “This will actively block children from being healthier. People will die.”
Closing the gap
AI productivity gains are not a silver bullet, regardless of what you heard on the All-In Podcast. Enhancements will come in fits and starts, and with them will be some dislocation for certain knowledge workers(although hardly the Armageddon forecasts that attract eyeballs to the news).
Sadly, there is no sneaky solution that doesn’t involve some cost or sacrifice. Austerity is coming in the form of both cost cutting and higher taxes. Absent that, inflation will persist and growing debt will sap growth through higher interest rates. These are taxes too, as they add to the cost of living in a most insidious way.
Any cost cutting that comes only from non-defense discretionary spending is purely performative (i.e. DOGE). At ~14% of the Federal budget, there simply isn’t enough there to make a difference. Cutting the entirety of that budget category would eliminate only slightly more than 50% of our annual budget deficit.
So where do the cuts come from?
Say goodbye to entitlements in their current form. The sooner the better unfortunately. These cuts are coming one way or another, it's just a matter of when. Our current and future working population cannot support the top-heavy elderly benefits that are currently promised. Do we wait for 2032 to have the cuts thrust upon our retirees, or do we make less drastic adjustments now?
That’s how we close the gap and that is why the OBBBA is the Last Great Giveaway. In the next few years, as the balance of power shifts from the Silent and Baby Boomer generations to Gen X, Millennials, and Gen Z the flow of riches will end and the difficult decisions will begin.
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*Gerontocracy: a state, society, or group governed by old people. Some fun facts: the median age of Congress has begun to fall, but remains 58 in the House and 64 in the Senate. 33 Senators are over 70, 14 are over 80, 1 is over 90. Here is more information from the New York Times.
**The Iraq War is assumed to cost ~$3T.