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How The US National Debt Affects Your Retirement

September 25, 2017
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As of September 2017, the US national debt clocks in at nearly $20.2 trillion, of which the top spending categories, in order of magnitude, are Medicare and Medicaid, Social Security, Defense and War, income security (e.g. Supplemental Security Income, unemployment compensation, nutrition assistance, foster care), new interest on debt, and federal pensions.


Each US citizen is responsible for almost $62,000 of the US national debt – if calculating individual burdens based on tax paying status, each taxpayer owes more than $167,000.  


When planning for retirement, many individuals focus on their personal budgets, unaware of how the growing US national debt may impact their post-career plans. US indebtedness to China garners the most media attention; however, the Social Security Trust Fund owns the greatest proportion of the national debt, holding nearly $3 trillion in trust.


That’s right. Social Security taxes – your retirement money – are used to fund the national debt.


How? Social Security takes in more taxes than it needs to fund the program. These excess revenues are used to buy treasuries, such as bonds, essentially transferring program funds to a general government cash pool used to pay for other services (and accrued interest).    


Social Security is not the only retirement pocket the US government picks, however. Funds extracted from public and private pensions, the military retirement fund, and all other retirement funds equal almost half of the US national debt. If the US defaulted on its debt, retirement savings for a great many Americans could disappear.


Aside from the threat of default, the US national debt affects the everyday lives of American citizens in a number of ways:


  • The standard of living for many generally decreases as the national debt increases. That’s because the probability of default increases in tandem with the national debt, causing interest rates of treasury bonds and other securities to increase. This, in turn, forces the government to divert more funds toward interest payments, restricting available funds used for the public good and economic growth incentives.


  • The cost of goods and services may increase. As interest rates on treasury securities increase, investment in American corporations are viewed as riskier, necessitating higher yields on corporate bonds. Basically, corporations must promise the prospect of a higher return on investment (ROI) to lure financial backers. To pay these higher interest rates or yields, corporations must pass the burden to consumers, raising the price of their goods and services, causing inflation and diminished purchasing power of the dollar.


  • The net worth of home owners Mortgage rates rise as the Federal Reserve and US Treasury increase interest rates and security yields. As mortgages become more expensive, home values are forced down to accommodate the greater number of future home owners qualifying for lower-than-usual mortgage loans.


The national debt is often discussed in ambiguous terms – how could the individual possibly grasp $20 trillion of debt when the average per capita income is only $54,000? It’s like imagining the universe as compared to an ant colony. But the national debt does have real impacts on the financial well-being of individuals, especially retirees who must live on a fixed income. Certain investments and sources of retirement income become riskier or unstable as the US national debt increases. To learn how you can mitigate these financial risks, please contact Retirement Income Specialists for your free consultation.