Can you grow GDP, cut taxes, and provide better healthcare and retirement options simultaneously?
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(Author's Note: This is the first of a series of articles exploring ideas and ways to fix the issues facing the modern Western world. These ideas are not meant to be entirely comprehensive. They are simply an exploration of options that are rarely discussed in contemporary politics.)
It should come as no surprise that the United States is on the brink of financial crisis.
The national debt is rapidly rising, with interest payments projected to hit $1 trillion by 2025, costing each of the approximately 160 million US workers around $6,250 a year in taxes. By 2034, those interest payments are expected to surge to $1.7 trillion, increasing the burden to $10,625 per worker. For a family with two working parents, that is a lot to fork over just to cover interest on debt.
The Congressional Budget Office (CBO) projects that these trends will not only continue, but will most likely increase substantially. By 2050, interest payments alone will likely exceed $2 trillion annually, as debt is expected to soar to over 200% of national GDP due to "spending consistently outpacing revenue for the foreseeable future."
This trajectory is, of course, unsustainable. Most Americans today struggle with the current tax burdens, which significantly affect their ability to provide for their families.
The average American household paid approximately $17,902 in combined income taxes in 2021 (around 29.3% of their income). But this was based on an average income of only $60,950 per year. For families making that amount, drastic increases in taxes to cover rising interest payments on debt could quickly become a crushing weight that brings their households and the whole economy crashing down.
If we look at what the federal budget is, we can quickly outline where the majority of spending is required.
According to the CBO, mandatory spending – which comprises nearly 60% of the federal budget – is slated to grow significantly over the next decade.
The US federal government spends approximately $6.27 trillion annually, with $4.1 trillion dedicated to mandatory spending. This includes $1.3 trillion for Social Security, $1.0 trillion for Medicare, and $600 billion for Medicaid; alongside other mandatory programs like SNAP and federal employee pensions, which account for about $1.2 trillion. Discretionary spending, including defense and non-defense programs, totals $1.7 trillion.
By 2033, however, spending on Medicare, Medicaid and Social Security alone is projected to rise to nearly $6 trillion, driven by an aging population and rising healthcare costs.
But what if there was another way?
Given these fiscal pressures, it's clear that the United States needs bold new ideas to ensure the sustainability of its healthcare and retirement systems. Simply raising taxes to cover ever-increasing costs is not a viable long-term solution.
Instead, what if we rethought how we fund healthcare and retirement, and changed it from a government-centric system to one that works for the people?
One proposal that has gained traction recently involves replacing the current system of government-run programs like Social Security, Medicare and Medicaid with personal healthcare and retirement accounts.
This system would involve giving each US citizen an initial grant at birth. The grant would be placed into an account that could only be used for the purposes for which it is intended. That money would be invested and grow over time, providing greater access to funding for healthcare and retirement savings than is currently available, at less cost to taxpayers.
Let's explore how this proposal works and whether it can truly deliver the fiscal relief we need.
PERSONAL HEALTHCARE AND RETIREMENT ACCOUNTS
The core of this proposal is simple: instead of relying on massive government programs, every citizen would initially receive two $15,000 grants at birth, split between a healthcare account and a retirement account. These accounts would be invested in low-cost index funds, which have historically provided average annual returns of approximately 10%.
Over time, these accounts would grow, providing individuals with the resources they need to pay for healthcare and retirement without relying on government transfers.
Key Features of the Proposal
Initial Grant at Birth: Each citizen would receive two $15,000 grants at birth – one for healthcare and one for retirement. These funds would be invested in low-cost index funds, which have historically provided an average annual return of 10%. Over a lifetime, these accounts would grow significantly, allowing individuals to cover both healthcare and retirement needs without relying on government transfers.
Annual Top-Ups: To ensure substantial savings for all, the government would provide $1,500 annual top-ups per account, totaling $3,000 annually. These top-ups would be invested alongside the initial grants. Lower-income citizens could receive higher top-ups, while wealthier individuals might receive smaller or no top-ups.
Restricted Access: The healthcare account would be accessible only for medical expenses, while the retirement account would remain locked until the individual reaches retirement age.
Additional Insurance: In addition to the accounts, an additional insurance could be required either from the individual (paid out by the account itself) while the funds are building; or, if the accounts are managed by the government, a larger insurance hedge could be put in place for all of them. This insurance would supplement the account in cases of catastrophic healthcare emergencies while the accounts are developing.
How the Numbers Work
Let's explore how this system would operate. Each citizen would receive two $15,000 grants – one for healthcare and one for retirement – plus $1,500 in annual top-ups per account. With a 10% annual return, these accounts would grow substantially over time. By the time a person reaches age 65:
Healthcare account: would grow to approximately $14.7 million.
Retirement account: would grow to approximately $14.7 million.
Together, these accounts would have a combined value of about $29.39 million by retirement age, more than sufficient to cover both routine and catastrophic healthcare needs and to ensure a comfortable retirement.
GOVERNMENT SAVINGS
Under the current system, the US government spends approximately $3.2 trillion annually on Social Security, Medicare and Medicaid, out of a total $4.1 trillion in mandatory spending. If these programs grow at the same rate, by 2033, spending on Social Security, Medicare and Medicaid will rise to $4.68 trillion, with overall mandatory spending projected to hit $6 trillion annually.
The proposed new system of grants and top-ups would cost around $1.12 trillion annually. Compared to the projected 2033 spending, this would result in annual savings of $3.56 trillion.
Without reform, mandatory spending is projected to rise to $6 trillion annually by 2033, with $4.68 trillion allocated to Social Security, Medicare and Medicaid. Over the next 10 years, total mandatory spending is projected to be approximately $54.5 trillion.
In contrast, implementing this new system would cost approximately $11.2 trillion over 10 years. This would lead to total savings of about $43.3 trillion over the next decade compared to the current trajectory.
THE IMPACT ON INCOME TAXES
With $3.56 trillion less in annual spending under the proposed system, the government would significantly reduce its reliance on personal income taxes. Currently, federal income tax collections amount to approximately $2.1 trillion annually. Under the new system, the government would only need to collect around $750 billion, meaning that income taxes could be reduced by as much as 70%.
This would have an immediate and substantial impact on American families. For instance, a family earning $85,000 per year currently pays around $9,760 in federal income taxes. Under the proposed system, their tax bill could drop to just $2,928, saving them nearly $7,000 annually. With millions of families experiencing similar tax relief, the increase in disposable income could lead to a significant boost in consumer spending and savings, fueling economic growth.
PROJECTED ECONOMIC GROWTH
The reduction in taxes and the resulting increase in disposable income would likely lead to a considerable boost in GDP growth. Increased consumer spending would drive demand for goods and services, creating a multiplier effect that economists estimate could add 1.5% to 2.5% to GDP growth annually. Combined with increased savings and investment from personal healthcare and retirement accounts, the proposal could result in overall annual GDP growth of 4-6% over the next decade.
THE 'IF NOTHING CHANGES' SCENARIO
Without reforms, the United States will face growing financial pressure. The CBO projects that mandatory spending will rise to over $6 trillion annually by 2033, with spending on Social Security, Medicare and Medicaid making up the bulk of this increase. To cover this, the government will need either higher taxes or increased borrowing, which would further balloon the national debt. In this scenario, GDP growth is likely to remain stagnant in the 2-3% range, far below the potential growth rates of the proposed system; and the debt burden will continue to escalate, slowing overall economic progress.
Of course, an idea like this is not without significant challenges. The transition period would have to be calculated to find the sweet spot between where someone would benefit more from a program like this than the current scheme, and that would have an effect on the total savings.
The point here, however, is to get us thinking, to get us looking for sustainable ways to shift our modus operandi toward a better future for our children. Instead of saddling Americans with massive taxes and costs for poor performing programs, something like this could secure their future while also addressing the costs of healthcare, lowering taxes, and even setting the nation up for a future in which population growth-fueled GDP may not be sustainable.
But that's a story for another day.
Arthur is a former editor and consultant. Born in India to missionary parents, he spent his early career working in development for NGOs in Asia, Central America, and Africa.
Arthur has an educational background in history and psychology, with certifications from the University of Oxford and Leiden in the economics, politics, and ethics of mass migration and comparative theories in terrorism and counterterrorism. He is currently launching CivWest, a company focused on building capital to fund restorative projects and create resilient systems across the Western world.
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