By Michael Crook, Head of Institutional and UHNW Investing Strategy, UBS CIO Americas
Following the passage of the recent tax reform, investors have increasingly expressed concern about the long-term impact on the size of the federal deficit and debt. The Congressional Budget Office estimated that the Tax Cuts and Jobs Act will add about $1.5 trillion to the deficit over the next decade. I can’t find up-to-date long-term projections on the Congressional Budget Office’s website, but their most recent update from March 2017 (pre-changes in the tax law) is sufficient for the point I want to make: The recent tax changes add to the deficit (and therefore the debt), but are a drop in the bucket relative to the unfunded Social Security and Medicare expenses we face over the next 30 years.
What does this mean for investors?
- Perhaps nothing in the immediate future except lower taxes for some families. Take advantage of them while you can.
- Longer term, something has to give. We can’t cut non-Social Security/healthcare expenses enough to matter, so we either have to cut benefits or increase taxes. Perhaps we’ll end up doing some of both.
- No matter which occurs—higher taxes or reduced benefits—it’ll mean retirees need more resources to meet their objectives.
- Gen X and Millennial workers are impacted too. They’ll almost certainly pay higher income tax rates, on average over their working careers, than their parents did. They’ll also receive lower entitlement benefits. Base case—They have to save a higher percentage of their income to make up the difference.