With the current US debt at around $31 trillion dollars and growing daily, is there a way out for America? Let’s dissect the question of whether there is a way out of this exorbitant debt. According to a recent Barron’s article the US debt is going to keep growing and growing, and the author sees no real way out of this situation. A recent Congressional Budget Office assessment forecasts that the US debt will increase more than $19 trillion over the next decade. We are in a formidable situation to say the least.
There is great concern with much of America about this rising debt and how to curtail or slow it down. President Biden and the Republican House of Representatives are challenged in coming to agreement on spending cuts vs. increasing the limit to allow the government to continue paying on its obligations. In a recent Pew Research Survey, 57% of Americans are concerned and want the debt to be addressed this year. Both parties agree that cutting the deficit is a leading priority. The Federal government has hit the debt limit at $31.38% and Janet Yellen has investigated ways of maneuvering monies to stave off shutting down the government for at least a few months.
The President and the House appear to be at a stalemate.
So, are there any solutions where they can meet in the middle? What does this continued growth do for future generations? We’ve been “here” before, and during the Reagan and Bush Administrations in the 1980’s and early 1990’s housing went through the roof with lenders loaning money to people who would not have otherwise qualified using underwriting guidelines from previous years. This caused the 2008 crash and the subsequent Great Recession. People lost their livelihoods, homes, retirement savings –basically, many lost their “shirts.” Then the banks/ Wall Street were bailed out. The trust of the American people was shattered and has never really recovered. (You can read more about the breakdown of the debt responsibility according to government branches here. )
The pandemic has taken the US debt to levels we have not seen since the 1940’s.
A possible ray of hope is that some economists say the US can withstand increasing debt or “safely afford to borrow more”1 because of the position of the US in the Global economy and the fact we pay relatively little in interest due to this position. However, others believe we definitively need to reduce borrowing to preserve things like Medicare, Medicaid, and Social Security. These are the three main drivers which are mandatory spending programs. Hard working Americans have contributed and saved a lifetime of money to plan for their retirement years. Out of control spending could squash those dreams and reduce or even eliminate deserved/earned reserves.
A combination of deep spending cuts and tax increases have been proposed many times over the years. Some have proposed increasing tax revenue by either eliminating deductions, raising rates on higher earners, or even implementing new taxes on things like carbon. Additionally, some have even proposed taxing higher earners on wealth or total assets in conjunction with taxing on income. There’s no doubt going to be a lot of continued arguing on “fairness” and what’s good for the economy. No matter what side of the political spectrum one is on, there are not many advantages to the proposed strategies thus far.
We need some type of reform.
The question remains how to balance so that everyone benefits.
While we can’t offer up many solutions as citizens, there are things we the citizens can start doing now to ensure our savings do not run out. Planning carefully by working with a professional financial expert can do several things. First, you can cut back on risk and still reap the benefits of compounding interest. Reallocation of assets into tax-free opportunities is something everyone should be looking into. Depending on the amount of assets held, they CAN be moved strategically so as not to bump families up into the next tax bracket.
At least for now, taxes are on sale until January 1, 2026.
Moving money to tax-free contracts now – paying the taxes at the lower rate gets the heavy lifting done while continue to allow growth without risk.
Second, look into creating an LLC. There may be some great tax advantages that eliminate personal liability by placing it on the corporation. Seek legal assistance in exploring whether this may be a good option. And definitely make sure you have assets held in a Trust to eliminate unnecessary Probate expenses – leaving more to your heirs.
Lastly, if you do have a significant portion of your nest egg inside a qualified account such as a 401(k) or traditional IRA, ask about doing Roth conversions while at the same time ensuring you do not move too much too quickly and knock you into the next tax bracket. The bottom line is everything you have accomplished to save and own is all connected when you look at taxes, legacy, and your retirement. I can’t emphasize enough to keep abreast of your situation and get an expert to do an initial diagnostic on your entire portfolio to look for the opportunities to improve your future outcome. Reach out to us if you’d like a free assessment or additional education about investing and saving at firstname.lastname@example.org or call us at 775-365-9429.