• Approximately two-thirds of working-age families participated in retirement plans in 2022, up slightly from 2019. Unfortunately, that means approximately one-third of families had no retirement plan other than Social Security. Overall, the mean retirement savings for those with retirement accounts aged 35-64 years old increased from $312,500 to $331,400. However, the mean retirement savings for those families in the bottom 50% of the income distribution declined from $66,600 to $54,700. What’s Ahead for 2024 In no particular order, some of the economic challenges for 2024: 1. The Federal Budget Deficit and Federal Debt Federal government funding, spending and debt have become hot political topics lately, and will likely continue to be controversial topics in 2024. The federal budget deficit refers to the amount U.S. federal government spending exceeds government income, which is primarily derived from tax revenues. When the federal government spends more than the tax revenue it takes in, a deficit occurs, which must be funded through the issuance of government debt. In some cases, deficits are desirable, such as in periods of economic downturns like the 2008 financial crisis and the COVID related economic downturn. During economic downturns, tax revenues decrease as the economy slows, which contributes to a budget deficit. Reducing government spending in an economic downturn could turn a recession into a depression. Consistent deficits lead to growing federal debt. Exactly how much federal debt is too much debt is open to discussion and not readily defined, but growing debt leads to a greater chunk of the federal budget going to pay interest on the debt, particularly if interest rates go up. The graph below shows the relationship between federal budget deficits and the total public (federal) debt. The blue line (left axis) indicates the budget deficits or surpluses that have occurred since 1980. Federal government spending has consistently exceeded federal tax revenues since the 1980s. Except for a brief period between 1998 and 2001 when the U.S. was enjoying excellent economic growth and the tech boom in its internet infancy, the United States has had budget deficits since 1980. Major events that played a role in significantly increasing the budget deficit include: 1) the financial crisis of 2008, 2) the tax cuts of 2003 and 2018, and 3) the COVID crisis of 2020. Economic downturns caused by the financial crisis and COVID had a double whammy on the budget deficit, evidenced by a significant reduction in tax revenues as economic growth turned negative and an increase in fiscal spending to stimulate economic recovery. The budget deficit usually decreases during periods of economic growth. That, however, changed with the tax cuts of 2018, which contributed to increasing budget deficits during a period of economic growth that began in 2010 and ended with the onset of COVID. Between 2015 and 2019, the budget deficit doubled to over $900 billion. The Congressional Budget Office estimated in 2018 that the tax cut would increase deficits by approximately $1.8 trillion over 11 years. The tax cuts of 2018 occurred during a period of economic expansion and an unemployment rate of only 4.0%. The increasing budget deficit following the tax cuts ensured that a budget surplus was no longer obtainable, based on the tax laws and the federal government spending structure in place. The U.S. economy was approaching full employment, yet the budget deficit kept growing. The tax cuts set the stage for a ballooning deficit if something went wrong with the economy, like it did in 2020 with the onset of COVID. In fiscal year 2020, the budget deficit hit a record $3.1 trillion. The red line (right axis) indicates the total public (federal) debt outstanding. Generally, the public (federal) debt outstanding reflects the accumulation of budget deficits, with subsequent budget deficits increasing the total public (federal) debt outstanding. Between 1980 and 2010, the debt rose from near $0 to approximately $10 trillion. Since 2010, the debt has approximately tripled to over $30 trillion with two major economic downturns and the 2018 tax cuts fueling the increase.
Central Wisconsin Report - Spring 2023
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