The Real Cost of Government Debt: How Will It Affect Your Retirement?Trevor Gerszt
It’s no secret that the United States government is in terrible financial shape. The national debt stands right now at $22.5 trillion, and most forecasts for future debt growth expect federal deficits to continue adding about $1 trillion per year to that total. But there’s a pretty ominous tipping point that’s coming up really soon that could cause that debt to spiral even further out of control.
One of the reasons the federal government has been able to take on so much debt in recent years is because of the extremely low interest rate environment brought about by the Federal Reserve’s quantitative easing in the aftermath of the financial crisis. With short-term rates near zero, and long-term rates at historically low levels, the federal government took advantage of those low rates to engage in huge amounts of stimulus spending. That’s why the government spent as much on interest on the national debt in 2012, when the debt was at about $16 trillion, as it did in 1998, when the debt was around $5.5 trillion.
But what goes down must come up, and interest rates will rise in the future. In fact, the rise just over the past couple of years has resulted in the government paying record amounts of interest just to service the national debt. In Fiscal Year 2018 the government paid a record $523 billion in interest, and that sum will be eclipsed in FY 2019.
In fact, analysts now expect that beginning in 2024 all new US government debt issuance will go solely to paying the interest on the national debt. That could be a sum of anywhere from $700 billion to $1.2 trillion per year. From that point on, barring a sudden change of heart on Congress’ part with regard to federal spending, every new dollar of deficit spending will go towards servicing interest payments on the existing debt. And of course those new deficits will spawn new interest payments, etc., etc.
You see how that spiral works, until finally debt issuance goes out of control, interest rates spike, no one wants to buy new debt, and the whole house of cards comes crashing down. That process will begin in 5 years. How will that affect your retirement, and are you ready?
How Will It Affect Your Social Security?
Just like the overall federal budget, Social Security is in bad shape too. The expected date for the Social Security trust fund to run out of assets is 2035. At that point the government will have to either raise taxes or issue new debt to fully fund Social Security benefits. But will we even get that far?
Starting in 2020 the government is expected to have to start liquidating the Social Security trust fund. Because the trust fund assets are in the form of non-marketable Treasury securities, the government will have to raise money to purchase those securities from itself. That will require new marketable Treasury securities to be issued, with those new interest payments adding to the existing interest expense.
Depending on how bad the budget death spiral becomes, Social Security may very well be an afterthought by the time 2035 rolls around. By that point the interest on the national debt may very well have swelled to levels that dwarf Social Security benefits, making a reform or financial shoring-up of the system a fiscal impossibility.
How Will It Affect Your Medicare?
Medicare is the other major program affecting retirees, particularly since those age 65 and up are pressured into entering the system. While Medicare expenditures aren’t nearly as large as Social Security’s yet, the growing number of baby boomers entering the system and steadily rising healthcare costs will drive costs even higher than they are today.
Medicare’s trust fund is expected to be depleted by 2026, a scant seven years from now. At that point the government will only be able to pay out a little less than 90% of Medicare benefits. It could decide to raise premiums to make up the shortfall, but that would put even more pressure on seniors. With both Medicare and Social Security in desperate need of fixes, the fiscal pressure they will place on the government is a severe double whammy.
What Other Effects Will There Be?
Let’s face it, without a severe overhaul of the way Congress spends money, there will be some tough financial decisions that need to be made over the next 5-10 years. A lot of people like to pretend that Congress doesn’t have a spending problem, that it’s a revenue problem instead. But that’s because Congress over the years hasn’t seriously tried to end entitlement spending. It puts programs like Social Security and Medicare on autopilot, then expresses shock that they’re spending more money than they should and are at risk of going bankrupt.
The “revenue problem” has normally been solved by issuing new debt. But once new debt issuance starts going only towards paying off interest, the increasing cost of Social Security, Medicare, the military, and everything else the government spends money on will put increasing pressure on Congress to do something. Don’t be surprised if the solution is to start raising taxes, and raising them back to levels that haven’t been seen in decades.
That’s obviously going to put a damper on business activity, cost American households thousands of dollars per year, and put a crimp on the economy. Don’t be surprised to see the government raiding pension plans, retirement accounts, and changing tax treatment of retirement investments in a bid to raise more money.
Wise investors will hedge against that threat by ensuring that their assets are as untouchable as possible. That largely means investing in gold, which has served to protect investors for centuries. With electronic assets easy to seize at the push of a button, owning gold provides safety and stability that serves investors well.
Remember, the federal government’s ultimate financial collapse won’t happen overnight. It’s something that’s been building up for years and years. Now we’re within 5-10 years of seeing how this experiment with massive deficit spending will turn out. Are you and your retirement savings prepared?