The Closure Rule

The Closure Rule is a modelling assumption that revenues (that is taxes) will dramatically increase at some point in the future.  It is basically the economic equivalent of magic fairy dust.  It assumes that something will happen in the future to magically make everything alright.  It is based on wishful thinking.  

It is generally not well understood outside tight academic and DC modeling circles that these models effectively crash when trying to project future macroeconomic variables under current fiscal policy. The reason is that current fiscal policy is not sustainable and forward-looking financial markets know it, leading to the economy “unraveling” through “backward induction”. Instead, in practice, the workhorse OLG model is generally “fixed” by augmenting it with an additional assumption---namely, a future fiscal policy action that is actually contained in current law. This modelling fix (also called “closure rule”) springs into action at a future date to stabilize the amount of debt held by the public relative to GDP. It often takes one of several alternative forms: a broad-based value-added tax (VAT); a proportional wage tax (not subject to any payroll tax ceiling); a proportional income tax; a broad-based reduction in spending; or, some combination of each. Both PWBM and CBO typically have this rule kick in the year 2050 or later, potentially with some gradual introduction. As it turns out, the exact form of the broad-based closure rule---for example, whether it is a VAT or some other tax---is not that important in terms of economic effects. What is important is that a large broad-based future corrective change in fiscal policy happens in any form to stabilize the debt-GDP ratio, and that such a correction action is anticipated by financial markets. Otherwise, forward-looking financial markets would unravel much sooner---a process known as “backward induction”---to cause a sovereign debt crisis. https://budgetmodel.wharton.upenn.edu/issues/2023/10/6/when-does-federal-debt-reach-unsustainable-levels

So, at some point, taxes will magically increase in the future to stabilize the model.  The modellers typically use a date of 2050 or 2060.  I think an earlier date will be required.  The Social Security Trust fund will be depleted in 2034.  Everyone just assumes that either A) benefits will be cut and no one will complain, or B) benefits will just be paid with no pain to anyone.  I don't think either of those assumptions are correct.  I think that the benefits MUST be paid and that taxes MUST increase drastically to pay for the fix.  So I would use 2034 as the date.  The system MUST be fixed by 2034 or "backward induction", which is an explosion in the time-space continuum traveling backwards in time, will occur, causing the system to blow up.  That's what I think - we have 11 more years to fix the system, or it will blow up.