Federal Debt and Your Retirement

Debt and Retirement

Personal debt plays a large role when it comes to saving for retirement and living as a retiree. Soaring debt resulting from increasing medical costs, credit cards, loans, and more limit the amount that workers can save and how much retirees can use in their golden years. Government deficits on the other hand are an elusive form of debt that occurs when annual government expenditures are larger than their yearly revenues. While deficits can have an impact on the short-term outlook of retirement security, the long-term effects of deficits building up over time can be much more damaging, especially if lawmakers continue to ignore the growing problem.

Some politicians and economists have sounded the alarm on the insurmountable level of debt that has been accumulated over the last twenty years, but no significant action has been taken. Since 2009, the national debt has increased $17 trillion dollars and increased rapidly in 2020 as the government spent more than $6 trillion in response to the coronavirus. As a result, the national debt has ballooned to more than $28 trillion and has the potential of reaching $30 trillion before the end of 2021. Not to be confused with the deficit however, which is the yearly amount of debt assumed by the country, the national debt is the accumulation of deficits year after year representing the grand total of money owed by the country. Most Americans pay no mind to how fast the nation’s debt is increasing, while others worry that it could cause the eventual downfall of the United States on the world stage. 

While the thought that the national debt could lead to the eventual downfall of the United States is unlikely to occur, the long-term impact of skyrocketing debt will eventually lead to higher taxes, inflation, and an extremely volatile economy for investors — 2020 highlighted this volatility. As debt substantially increased, the government issued more Treasuries to cover new spending deficits being added from large stimulus packages to keep the economy afloat. Following the basics of supply and demand, as the volume of Treasuries in the market increases, the interest rates paid on those treasuries naturally decreases, ultimately hurting the interest rate environment in the long run. When the interest rate environment takes this kind of a hit, bonds, certificates of deposit, and savings accounts become less attractive for investors. 

Since the onset of the COVID pandemic, banks have offered less than 1% on many of their investment vehicles, such as CDs. This has made it difficult for investors to grow their retirement savings, let alone keep up with inflation especially when the stock market initially crashed in March of 2020. Furthermore, when the interest rate environment struggles, investors turn to the stock market, exposing themselves to market risk and fees while jeopardizing their principal in the process. 2020 and 2021 have been prime examples of how short-term debt obligations can damage and bring uncertainty to the field of retirement investing. 

Although low interest rates have caused the stock market to reach record highs, stocks eventually must come back down. The gradual shift that has taken place on the stock market in recent weeks is a window to the eventual long-term impact of rising debt. Stimulus bills have been the largest expense adding to the massive annual deficit created in responding to the pandemic, but temporary one-time stipends paid to eligible taxpayers has some economists fearing that pent up demand will explode into the market as the country reopens which could cause the economy to overheat. A sudden rise in economic activity could trigger inflation and cause interest rates to rise to reflect stronger economic activity. Recently, Treasuries have risen by a couple basis points which have jolted the stock market into a turbulent selloff. While increasing interest rates would be welcomed news to risk adverse investors with money in bonds and CDs, this shift would correspond with a gradual or rapid decline in the stock market, hurting investors who stayed on board a sinking ship. 

If interest rates increase substantially, consumers would feel the sting in other sectors of the economy as well, specifically relating back to paying down personal debts. Mortgages and student loans would become more expensive with increasing interest rates forcing consumers to focus more of their funds to pay down their own personal debt; this leaves less income available to invest in retirement accounts. Although interest rates and stock market volatility are seen as short-term effects of deficit spending, the long-term effects are dependent on how the debt is addressed by lawmakers. At the end of the day however, the national debt plays a silent but potentially deadly role in the realm of retirement investing.   

Finally, aside from the constant threat of inflation decreasing economic output, consumers could lose purchasing power if the government decides to raise taxes. The largest portion of revenue collected by the federal government is by way of taxes and considering lawmakers are generally reluctant to cut spending, the other avenue frequented by policymakers to address the nation’s debt crisis is to increase revenue. Similarly, to how inflation reduces how far a consumer can stretch a dollar, higher taxes mean less income in the pocketbooks of Americans, which creates a similar ripple effect that limits how much consumers are able to save and spend in their retirement. 

Ultimately, these basic examples highlight how deficits, and the total national debt are more interconnected to retirement saving than many investors realize, and it is a problem that has gone unchecked for far too long. It would be impossible to condense all the nuances of the national debt and how it impacts short term and long-term retirement saving, but it is important for investors to have a general understanding of what dangers potentially lie ahead as the country recovers from the coronavirus pandemic, especially if their retirement funds are left at risk on the volatile stock market.