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Debt Ceiling Debate Could Spell Disaster for 401(k) Plans

Debt Ceiling Debate Could Spell Disaster for 401(k) Plans

Retirement Savings Put at Risk by Debt Ceiling Impasse

The US recently hit its $31.4 trillion debt ceiling. The debt ceiling is a legislative limit on the amount of debt the United States government can incur. When the government reaches this limit, it must either raise it or take steps to reduce the debt. As the risk of default looms, the economy and retirement funds are put in jeopardy.

One potential effect of the debt ceiling on 401(k) plans is increased market volatility and uncertainty. If the government is unable to raise the debt ceiling and defaults on its debt, it could cause a financial crisis and crash the stock market. This would likely result in a significant drop in the value of 401(k) plans.

Congress faced a similar debt crisis in 2011. Wrangling until the last minute to reach a deal caused the stock market to plunge. It fell 14% over 4 weeks. Such a drop would add more misery to investors who have already seen the S&P 500 fall more than 19% this past year. Moody’s Analytics chief economist estimated that a US government default now would cause the stock market to plummet by one-third and wipe out $15 trillion in household wealth.1

Additionally, the government could be forced to cut spending to reduce its debt. This could lead to a slowdown in economic growth and speed the country into recession. The decrease in corporate profits would also negatively affect the value of 401(k) plans.

The debt ceiling crisis can add fuel to already red-hot interest rates. When the government reaches its debt limit, it may be forced to borrow money at higher interest rates. This, in turn, would increase the cost of borrowing for businesses and individuals. Higher interest rates on loans and credit cards could make it more difficult for people to save for retirement.

This happened in the 2011 debt crisis as well. Standard & Poor downgraded US debt for the first time. The cost of borrowing increased and erased confidence in the dollar. Today, a default would devastate already high interest rates. Johns Hopkins University business lecturer Kathleen Day said, “The cost to borrow for homes, cars and credit cards would explode. In short, default would cause mayhem.”2

With no money to fulfill its obligations, the government might not be able to pay for Social Security and Medicare. These programs are mandated spending, meaning the US must pay for these benefits. No one knows exactly how that would be resolved and few people want to find out. The debt ceiling crisis is creating an opening for some in Congress to propose cutting Social Security benefits or raising payroll taxes.

Treasury Secretary Janet Yellen said her department has been forced to take ‘extraordinary measures’ after the government debt ceiling was hit. These measures include halting investment in two federal retirement funds. Yellen wrote that the length the extraordinary measures may last is subject to “considerable uncertainty”.3

Investors Turn to Precious Metals

Wall Street traders are rushing to precious metals as the risk of default increases. A government loan default would destroy investor faith in the dollar. A debt crisis combined with a weakening dollar and persistent inflation makes a strong case for moving funds into safe haven precious metals. Knowing that, gold and silver are predicted to boom. Gold jumped roughly 15% and silver jumped 21% in the last three months as stocks fell. An online survey showed investors could see silver jump more than 50% in 2023 to reach $38 an ounce, while gold could top out at a record $2,100 an ounce.4

The debt ceiling crisis could spiral into unchecked uncertainty and turmoil. Now is the time to learn how a Gold IRA can protect your savings. Contact us today to learn more.

Notes:
1. https://www.cbsnews.com/news/debt-limit-ceiling-impact-on-your-finances-social-security-medicare-401k/
2. https://www.cbsnews.com/news/debt-limit-ceiling-impact-on-your-finances-social-security-medicare-401k/
3. https://www.marketwatch.com/story/yellens-treasury-dept-halts-two-federal-retirement-funds-after-government-hits-debt-limit-11674162566?mod=article_inline
4. https://www.foxbusiness.com/markets/gold-and-silver-boom-predicted-us-hits-debt-ceiling-dollar-devalues

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