Casey Snyder and Tom Sedoric

When we advise clients that tax rates likely aren’t going to be lower in the foreseeable future, we encourage them to mitigate the risk within their plan and portfolio by working together to create future tax flexibility and efficiency . When they ask us why this will be the case, it is our obligation to educate them about a wide range of issues.

When families gather around the holiday dinner table in the coming weeks, there will likely be many personal, and perhaps political, discussions as a presidential election year is right around the corner. Yet, it is likely that few, if any, will talk about issues that may have the most significant and complex economic impact on every generation for decades to come. We are speaking about debt - historical levels of debt. There is a critical mass of debt issues that interact to create a quiet perfect storm that few want to confront, much less talk about. Here are three:

  • Americans are collectively in consumer debt to the tune of almost $14 trillion in 2018, according to the New York Federal Reserve. That includes mortgages, auto loans, credit cards, health care and student loans. According to the U.S. Department of Education, there are 43 million Americans holding $1.5 trillion dollars in student loan debt, with a vast majority of those in the age range of 25-34.

Not surprisingly given the election cycle, there are some policy proposals by Democratic presidential hopefuls to eliminate either part or all student loan debt. In theory, it seems a reasonable attempt to help younger Americans get better financial footing. But the fine print of paying higher taxes for such a proposal provides yet another generational clash of priorities.

  • Consumer debt is relatively easy to understand while public pension liabilities seemingly defy believability. There are dueling figures but one of the best-case scenarios is offered by a Pew Charitable Trust study from earlier this year. Overall, there were $4.1trillion in pension obligations to workers and retirees in 2017 and $2.9 trillion in assets which leaves a funding gap of more than $1.2 trillion. 

In a recent Wall Street Journal article on the tightrope that pension fund managers walk, Spencer Jakab wrote:

The very fact that stocks and bonds have enjoyed bountiful returns since the 1980s explains why they probably won’t in the future.

On another front, Congress has tackled private pension liabilities. In July, the House passed with bipartisan support the Butch Lewis Act which would create a loan program through the Treasury Department to help struggling multiemployer defined benefit pension plans to borrow necessary funds to put plans back on solid financial footing.

  • The problem of collapsing private pension plans is real and paying to plug the financial dike will also be real. The same can be said of rising obligations for Social Security, Medicare, Medicaid, national defense, and the unknown environmental costs of global climate change. We have talked before about the rising federal debt and with each passing day it grows larger. The 2019 federal budget of $4.4 trillion required borrowing of $960 billion, or 3.9 percent of GDP, up from a little more than two percent of GDP in 2015. The Office of Management and Budget estimates that if current budget underfunding continues, the budget deficit in 2029 will encompass 4.5 percent of GDP. The federal debt will grow from 77.8 percent of GDP in 2018 to 95.1 percent of GDP in 2029.

The trends we have highlighted do not guarantee that taxes will rise – after all, in 2017, Congress did pass $1.5 trillion in personal and corporate tax cuts that have yet to pay for themselves – but they do portend stormy weather whether we talk about them or not.

 

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754