Taking debt seriously
There’s stormy weather ahead on several fronts, and it needs to be discussed
When families gather around the holiday dinner table, there are likely many personal, and perhaps political, discussions. 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, healthcare and student loans. According to the U.S. Department of Education, there are 43 million Americans holding $1.5 trillion in student loan debt, with a vast majority of those in the age range of 25 to 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 a 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 $4.1 trillion 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. This was an improvement from a $1.35 trillion funding gap in 2016, but most states have yet to recover from the 2007-09 recession. The study found that just eight states had 90% funding while 24 states had funding levels of 7% or worse, including some in the 50% to 55% range.
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% of GDP, up from a little more than 2% 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% of GDP. The federal debt will grow from 77.8% of GDP in 2018 to 95.1% 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.
Tom Sedoric is partner, executive managing director and wealth manager, and D. Casey Snyder is partner, senior vice president and wealth manager at The Sedoric Group of Steward Partners, Portsmouth, 603-427-8870 and thesedoricgroup.com.