Let me tell you a story.
Meet the Schmidts. They live in a semi-rural town, and between their jobs, bring in around $56,000/year. Grandpa Schmidt lives with them, and his pension contributes another $21,000 to the family budget.
Unfortunately, they're spending more like $82,000/year, and slowly sliding deeper and deeper into debt, with the total sitting right around $360,000. Just keeping up with the minimum payments costs more than $500/month or $6,000/year. If you ask them about a plan to pay off their six-figure debts, they just laugh nervously, or change the subject.
They'd like to cut their spending back, but they feel obligated to much of it. Grandma Schmidt has dementia and is in a nursing home that runs around $31,000/year. Everyone celebrates that Grandma's in good health otherwise, but that means her annual expenses are also going to be around for the foreseeable future. Grandpa's pension helps cover that, but the gap is being dealt with as part of the family's budget.
Their own medical care costs them another $8,000/year, between insurance premiums and the expenses insurance doesn't pay.
They spend another $25,000/year on the "four walls" -- their house, home maintenance, property taxes, utilities, etc. The last $12,000/year goes for food, clothing, and household supplies. None of it seems extravagant, it's just what things cost.
When they look for budgeting advice online, people tell them that they just need to "break their latte habit," but they don't have a latte habit. Their paychecks are almost entirely spoken for by the time they get any money to budget, and while they might be able to trim some small line items in their budget, the real fat has been cut long since.
A financial counselor once suggested Mr. or Mrs. Schmidt getting an extra job to raise extra income, even just for a little while, but they didn't go for that. The counselor also suggested looking into cheaper options for Grandma, perhaps giving in-home care another shot. The Schmidts stormed out of the counselor's office and haven't been back.
Of course, they're keeping up with their minimum payments for now, so they're not being harassed by creditors. They make good money, and will probably be able to keep scraping by for a good while, and mostly they just don't talk about the fact that they're living beyond their means. But in the back of their minds, they also know that it would only take a blow to their income -- or another home repair disaster like they had a few years ago -- and things could get really nasty, really quickly.
What advice would you give the Schmidts?
When I posted the above on a different forum, the answers came back into a few discrete camps:
- Find alternatives to the nursing home -- there has to be a way to reduce that expense without greatly reducing Grandma's quality of life
- Extra job to get more income (or reduced expenses through better insurance)
- Declare bankruptcy to get rid of the debt -- without the minimum payments they'd be on an even keel, albeit with no slack
Of course, you probably caught that the Schmidts don't actually exist. The Schmidts are the US federal government. This is the federal budget, divided by fifty million to bring incomprehensibly large numbers onto a scale normal people can reason about. Tax revenues bring in a total of 3.6 trillion dollars. Social Security and Medicare cost $1.57 trillion -- offset some by payroll taxes, sure, but that money is already counted in the $3.6 trillion. The medical care is Medicaid. "Household expenses" are the budgets to care for governmental and military retirees.
That $25,000 in housing expenses? That's the $1.2 trillion "discretionary" budget, spent on everything else the goverment actually does to keep the country functioning. Most of it is military spending. That's what Congress is constantly arguing about with their government shutdowns. But the problem is, it's such a small part of it. The rest of the money just keeps spending, like a bad gym membership on auto-pay.
Most of our federal budget goes to a few programs -- Social Security, Medicare, the military, and interest on the federal debt. The interest isn't topping things quite yet, but by 2026 it will more than double, topping everything except Social Security. Declaring bankruptcy and blowing away the debt would basically ruin the US economy, so it's not much of an option.
When you look at it as a household budget, common-sense solutions are obvious. Reduce the nursing home expense -- a.k.a. reduce the expense of Social Security. Increase income -- a.k.a. raise taxes. But when you talk about those as political issues, no one likes those ideas.
So instead, we continue to squabble about minor changes inside the discretionary budget. Whenever anyone advocates trying to change the course of the major drivers of our deficit, people turn out in hordes to oppose it. (Don't touch my Social Security! No new taxes!)
There's an argument that of course you can't run a government with the same mindset as a household -- but why not? Sure, governments need to be able to spend on deficit sometimes to get the country through a recession or depression -- but that's no different from households that need access to credit to weather variability in income.
This can't continue. In my opinion, it's the most fundamental long-term issue facing our nation, and I'm appalled that far from proposing real solutions, both major-party candidates are proposing increasing the deficit further. (One dramatically more than the other, however.)