Believe it or not, our government is fairly transparent when it comes to its own spending - and the impact it could have down the road.
In fact, the Congressional Budget Office regularly publishes data on U.S. government spending and revenue and analyzes how that spending could affect the nation’s fiscal stability in years to come.
Last month, the CBO published one of these updates.
The Latest Data on Deficit Spending…
Back in January, the CBO issued baseline projections for what the federal budget would look like in the current fiscal year, as well as over the next 10 years if tax and spending generally remained unchanged.
In June, they updated their projections because projected spending was now outpacing projected revenue by a larger amount.
Here’s what we learned in the updated report:
The deficit for FY24—which is the difference between the money the government raises and the money it spends—is now projected to be $1.9 trillion, 27% higher than the CBO projected back in February.
That’s nearly $2T in deficit spending this year.
And over the next ten years, the outlook is even worse.
Why?
The CBO explains it simply: Increases in mandatory spending (Social Security, Medicare, Medicaid) will far outpace any potential reductions in discretionary spending (defense spending, Congressional appropriations, supplemental spending) AND potential growth in revenue (taxes).
… And What it Means for U.S. Savers
So we know America’s fiscal outlook is getting worse. But what does it mean for U.S. savers - especially those heading into retirement?
Here’s my key takeaway from the CBO’s updated projections:
There are three areas the government can adjust to balance spending and revenue:
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Mandatory spending, which is spending codified into current law (like Social Security and Medicare)
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Discretionary spending, which is all the appropriations and supplemental spending passed by Congress
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And revenue, specifically in the form of taxes
The CBO has told us mandatory spending is outpacing tax revenue under current law - even if Congress reduces its own spending.
So, no matter how fiscally conservative Congress is over the next decade, our deficit (and overall public debt) will continue to rise UNLESS we have a significant increase in revenue – i.e., taxes.
And since individual income taxes are by far the single largest revenue source to the government, that’s an easy place for the government to generate the additional revenue it needs.
How Tax-Deferred Savings Could Be Impacted
Tax-deferred savings vehicles - like IRAs and 401(k)s - remain the most popular way Americans save for retirement. In fact, savers currently have trillions of dollars saved tax-deferred.
All of these savers hope to pay lower tax rates in retirement when they access these funds—after all, that’s the promise of tax-deferred saving.
But what happens when our government needs to generate more income tax revenue to offset its growing mandatory spending?
Savers may find they are paying taxes on their retirement assets at a much higher rate than planned.
And that means more of our clients’ savings could be going to the IRS, leaving them with less income to spend on their needs in retirement.
In short, savers who have deferred their taxes in an IRA or 401(k) may find they have a far bigger retirement tax bill coming than planned.
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Putting this Knowledge to Work for Your Clients
2024 is an election year, and I get asked pretty often how the election will impact U.S. savers. Many of us are looking to January for answers: who will occupy the White House? What policies might that candidate pursue?
And, of course, the election’s outcome matters. But regardless of who is in the White House come January, our nation has a spending problem—one that will likely require a tax-raising solution.
That’s because - as the CBO clearly stated last month - our required spending is far outpacing the revenue we generate as a nation.
We are likely entering an era of rising taxes on American savers. At this point, it’s more of a demographics problem and math problem than simply a political one.
So, let’s make sure our clients are prepared for the risk of rising taxes. Tax diversification is increasingly a critical component of comprehensive retirement planning—and the CBO’s latest report makes it more pressing than ever.
