Retirement savers are finding they have to remain extra vigilant these days to mitigate risks to their hard-earned nest eggs.
For one thing, there’s high inflation. Prices lifted off from the Federal Reserve’s 2% target in April 2021 and have yet to look back. Despite three straight interest-rate hikes of 75 basis points each since June, inflation remains around 40-year highs.
In fact, there’s reason to believe inflation is actually intensifying. Although the gasoline index dropped nearly 5% last month, headline inflation accelerated 0.4% in September following a mere 0.1% in August and no increase at all in July.
Making matters potentially worse is that the relief from soaring gas prices Americans have enjoyed recently may be coming to end. OPEC Plus has announced they’ll be cutting oil production by two million barrels per day beginning in November. There are projections the move will send the price of oil well over $100 per barrel by the end of the year.
As if that isn’t enough, retirement savers also must contend with the fallout from efforts to contain inflation.
The Federal Reserve has resolved to raise interest rates as much as necessary in order to pull inflation back down to 2%. The resulting economic volatility has severely rattled IRAs, 401(k)s and other repositories of household wealth this year. There are estimates that total U.S. household wealth has declined by as much as $10 trillion so far in 2022. And should the Fed remain committed to raising rates until inflation comes all the way back to earth, it’s reasonable to speculate we’re in store for a lot more of this same volatility.
That’s quite a lot for retirement savers to deal with right now. Unfortunately, though, that’s not all of it. There’s this, too: Our nation’s debt load continues its rapid climb to never-before-seen heights.
While high inflation and concerns of an imminent economic downturn have dominated the financial news cycle, the national debt “achieved” the dubious milestone of officially crossing above the $31 trillion mark earlier this month.
What makes the debt’s surpassing of yet another trillion-dollar threshold particularly notable is the interest-rate climate in which it occurred. The Fed’s view is that the stubbornness of high inflation essentially demands an ongoing increase in interest rates. As those rates are hiked, the national debt becomes even more expensive. And as the debt becomes more expensive, the far-reaching potential implications of that national burden for retirement savers become even more significant.
Let’s unpack the reasons why.
It probably is a bad sign that the gross national debt can rise another trillion dollars and do so relatively unnoticed. What’s even worse, in my opinion, is that it can go up by another trillion as quickly as it does nowadays and few seem to bat an eye.
In an effort to put the stunning rate of growth in perspective, Loyola Marymount economics professor Sung Won Sohn notes, “It took this nation 200 years to pile up its first trillion dollars in national debt, and since the pandemic we have been adding at the rate of 1 trillion nearly every quarter.”
Indeed, it was only last January that the gross national debt reached $30 trillion. And now here we are, already at $31 trillion.
The speed at which the national debt has surged upward over the last couple of decades implies a blatant disregard for fiscal soundness. And that portends an even higher national debt in the future.
As far as that goes, President Biden clearly is doing his part to make sure the accelerator of the national debt stays pressed squarely to the floor. The president’s disingenuous public claims of deficit reduction notwithstanding, estimates by the Committee for a Responsible Federal Budget (CRFB) say Biden will be responsible for having expanded the deficit by nearly $5 trillion between 2021 and 2031. That sum represents the total projected cost of a variety of legislative and executive initiatives, including the American Rescue Plan, aid to Ukraine, and student-debt cancellation.
In fairness to the president, it’s been a long time since fiscal prudence has served as the guiding light of any president from either party. Bill Clinton was in charge the last time an annual budget surplus was created. That surplus was generated in fiscal year 1998 and remained intact through fiscal year 2001, into the beginning of the George W. Bush administration. Relatedly, the gross national debt saw successive drops from 1998 to 1999, 1999 to 2000, and 2000 to 2001. They’re the only years among the last 40 in which the national debt shrunk in any measure.
The bottom line is that virtually no one in any position of political authority – neither Democrat nor Republican – seems remotely interested in reining in spending to any meaningful degree. And that means we all can expect the federal debt to continue climbing on the basis of what has become a secular commitment to spending.
But this commitment to new spending is not the only reason the debt will continue to rise. It also is rising because of the costs associated with servicing the massive obligation. As the Federal Reserve continues raising interest rates in an effort to contain inflation, we can expect those costs will continue to climb – and put an even bigger question mark next to the nation’s fiscal outlook.
CBO: Interest on the National Debt Will Be the Country’s Single Biggest Expense
In its Budget and Economic Outlook: 2022 to 2032 issued in May, the Congressional Budget Office (CBO) projected annual net interest costs of the debt would be $399 billion this year and total $8.1 trillion through 2032.
As daunting as those numbers are, they pale in comparison to the forecast over the next 30 years. The Peter G. Peterson Foundation – a nonpartisan organization devoted to raising awareness of America’s long-term fiscal challenges – notes the CBO’s outlook for the impact of interest on the federal debt through 2052 is positively hair-raising. Interest payments are projected to total roughly $66 trillion. By 2052, 40% of all federal revenues would have to be allocated to interest alone. That also means interest on the debt is slated to become the nation’s single-biggest expense. Money spent to service the debt will exceed what’s spent annually on defense by 2029, on Medicare by 2046, and on Social Security by 2049.
But remember – these projections are based on data available through last May. Given how both inflation and the effort to chase it down have transpired since then, the impact of higher interest rates on the debt ultimately could prove far greater than what was projected earlier this year by the CBO.
The CBO’s projections say annual net interest costs on the debt will grow from $399 billion in fiscal year 2022 to $442 billion in fiscal year 2023. However, according to analysis by Allan Sloan of the Washington Post and Marc Goldwein of the Committee for a Responsible Federal Budget (CRFB), the extra-large-sized rate hikes initiated by the Federal Reserve throughout this year already change that outlook drastically.
Based on the numbers-crunching done by Sloan and Goldwein, interest payments on the debt could total almost $580 billion in fiscal year 2023. As for 2024, the CBO’s projections from May have interest payments totaling $525 billion next fiscal year, while Sloan and Goldwein say those payments could end up to be an astounding $719 billion.
And, of course, the speed and strength of the rate increases – both realized and anticipated – undoubtedly will exert the same magnitude of changes on the longer-term projections, as well. As Allan Sloane wrote when he closed out his piece, “When the next [CBO] update comes, which typically happens in January, the interest numbers may well be high enough to knock your socks off.”
Regarding the potential impact of those interest numbers on the economy, well, that could prove far more jarring.
The potential fallout from an unchecked national debt shouldn’t be ignored. The eventual consequences could be extraordinary, and might include a fiscal crisis that, in turn, triggers a financial crisis.
The fiscal crisis would result from a loss of confidence that the government could service and repay their obligations to investors in U.S. debt. If this loss of confidence was to spread, it would almost certainly force the government to pay higher rates of interest on federal debt in order to provide investors the higher yields they would demand to offset their risk. These higher rates of interest would consequentially trigger higher inflation. The value of the dollar would likely fall.
If there was an outright default on the debt, it’s a virtual certainty you’d see all of these eventualities in one measure or another. You may recall there was a stalemate one year ago between congressional Republicans and Democrats over the matter of raising the debt ceiling. At the time, concerns grew that America might default on its debt for the first time in history. While the matter of the debt ceiling remained unresolved and the possibility of default lingered, Treasury Secretary Janet Yellen underscored the gravity of the situation, declaring that “the full faith and credit of the United States would be impaired” should there be a default. She added that the resulting crisis would represent nothing less than “a catastrophic event for our economy.”
The rapidly unfolding events of a debt-cued fiscal crisis would almost immediately catalyze a financial crisis. As rates for Treasury instruments soared, the value of outstanding government securities would drop. The CBO notes that institutions holding these securities – such as pension funds, mutual funds and banks – could suffer losses big enough to cause some of them to fail. Financial contagion on a global scale likely would result.
Let me be clear: We’re not on the verge of these dire events unfolding simply because the national debt has crossed above the $31 trillion mark. However, in my view, it’s worthwhile to consider these reasoned projections from credible sources about the national debt’s possible impact on the future economic welfare of the nation and the world.
Prudent retirement savers likely have evaluated the ways they can help mitigate the risks associated with persistent high inflation and possible recession. That’s smart, in my view. What I think is also smart is for those same retirement savers to think about ways they can mitigate the impact of economic volatility that very well could arise from a national debt that ultimately proves unmanageable.
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