Debt-ceiling deal averts steep losses for retirees
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Had Congress not acted to lift the federal government’s debt ceiling limit, it would potentially threaten the retirement savings of millions of Americans, according to the National Association of Plan Advisors.
An industry group representing retirement plan advisors issued a very deep -- and very public -- sigh of relief this week, as Congress voted to avoid defaulting on paying interest on America’s public debt instruments, officially increasing the debt ceiling.
The group -- the National Association of Plan Advisors (NAPA) -- noted that although Congress has never failed to approve borrowing authority to cover existing obligations, it has come very close. So, the latest near-debacle has precedent. And, the group notes, even near-misses are potentially very expensive for retirees.
“While the federal government has never defaulted, failure to lift the nation’s debt ceiling -- a potential crisis now averted -- could have had a significant impact not only financial markets, but a devastating impact on retirement savings,” NAPA said in a release.
In not-very-subtle language, NAPA expressed deep concern at just how shaky the debt ceiling process has become in recent times.
“Amid lingering fears that Congress would not act to lift the federal government’s debt ceiling limit, defaulting on its interest obligations and in the process potentially threatening the retirement savings of millions of Americans, after months of political maneuvering, lawmakers finally acted,” the group said.
NAPA highlighted that the vote to raise the debt ceiling by another $2.5 trillion -- necessary to continue paying the government’s obligations -- came only after a messy, contested battle and was very narrow, partisan and concerning for the future, passing Dec. 14 and 15 only by 50-49 in the Senate and 221-209 in the House.
An analysis done by NAPA’s affiliate organization, the American Retirement Association (ARA), found that a default on public debt “could create losses in excess of 20% for all pension assets.” Potentially even worse losses would compound the problem, since a debt default could kick off a general recession, which in recent history have led to 30% reductions in pension asset values.
The ARA paper drew on multiple other outside analyses, including one by the Urban Institute.
“It is important to recognize that these declines have long lasting effects on the future balances of retirement savings,” Judy Xanthopoulos, the author of the ARA report, said. “Specifically, the debt crisis lowers the balances, which dampens performance in all subsequent periods. Therefore, if the retirement balances decline substantially as a result of a debt crisis, then retirement saving in all future quarters will be permanently lower.”
In addition to bringing asset devaluations -- very harmful to current and soon-to-be retirees -- a debt-ceiling default would hit current federal employees. Without borrowing capacity, the government could no longer pay salaries, contractor pay or other expenses, causing a government shutdown. The General Accountability Office in recent months explored these and other issues, and issued an explainer on the potential costs of delaying on raising the debt ceiling.
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