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How would a debt ceiling breach impact your 401(k)?

The failure to raise the debt ceiling which would cause the US to default on its financial obligations could do serious harm to American retirement savings.

Debt ceiling breach could clobber retirement savings

The clock is ticking down to increase the debt ceiling to avoid the first-ever default on the national debt. The consequences can only be speculated, as it has never happened before, in the US at least. But previous episodes of brinksmanship and holding the US federal borrowing, and along with it the US economy, hostage for political gains can give us a glimpse.

In a technical sense, the US has already hit the debt ceiling and can no longer borrow money to cover the bills as the federal government spends more than it takes in. That happened back in January and the nation’s finances have been living on borrowed time since. The US Treasury implemented extraordinary measures at the time, shifting money around that is available to keep paying the bills. However, Secretary Janet Yellen has repeatedly warned Congress that that wiggle room will run out as soon as 1 June.

How would a debt ceiling breach impact your 401(k)?

The fallout from the US defaulting on its financial obligations would be simply put, catastrophic. Not just for the US but the global economy as well. Even the risk of it happening will most likely have consequences for everyday Americans. In 2011, while Congress avoided a default, the brinksmanship is estimated to have raised borrowing costs by a total of $1.3 billion that fiscal year according to the Government Accountability Office (GAO). US Treasury yeilds are already rising.

Going over the edge so to speak, would be even worse. Some economists predict that stock markets could plunge by a third, the White House projects a 45 percent drop in its potential scenarios of economic impacts. That would hit retirement savings and 401(k)s hard.

A 2023 report from Moody’s predicts that $12 trillion in household wealth would be erased. GDP could contract by 4 percent and unemployment soar to over 7 percent.

What is the chance of the US defaulting?

President Biden has been in negotiations with Republican Speaker of the House Kevin McCarthy. Those talks have mainly been between aides from the White House and the Speaker, but there have been a couple face-to-face encounters.

Those in-person meetings were carried out along with the leaders of both parties in the Senate and the top Democrat in the House. However, Senate Minority Leader Republican Mitch McConnell has said that McCarthy can handle the negotiations directly with Biden from here on out.

The options, with very few days remaining, are a negotiated deal or a clean bill with no strings attached to raise the debt ceiling, or suspending the debt ceiling until an agreement can be reached. Barring one of those the US economy will go off a literal fiscal cliff as soon as 1 June and pull the global economy along for the ride.

Speaker McCarthy says that there isn’t a risk of a default because House Republicans passed their so-called the Limit, Save, Grow Act along party lines with four GOP representatives voting “no”. Two problems with that though.

One the Democrats will not agree to the “terms” of that legislation in the Senate which would mean changes and thus another vote in the House to approve those. In there lies the second problem.

Can the Speaker muster enough votes from his members along with enough Democratic votes? Depending on what changes are made, it might be electoral suicide for any Democrats that vote for the spending cuts that will most likely stay in the bill. McCarthy will need to muster 218 votes in favor of whatever comes out of the Democratic-controlled Senate to ensure it passes and his own party has proven itself unruly.


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