America’s debt ceiling was reached – again – on January 19, 2023 as the country exceeded its $31.4 trillion spending cap. The cap was raised to that amount in December 2021. As much terms like “ceiling” and “cap” are used in this discussion, the truth is this limitation is more of a temporary hindrance than a cut-off – the cap has been raised 78 times since 1960.
While this may seem like a topic outside of your realm of concerns, the longstanding effects of not having this ceiling raised again have a strong potential to bleed over into your personal finances – namely your 401(k), Social security and Medicare.
For more guidance navigating the implications of the debt limit ceiling, consider matching with a vetted financial advisor for free.
What Is America’s Debt Ceiling?
The national debt ceiling is the legal limit on the amount of debt that the U.S. government can incur. This limit is set by Congress and is intended to ensure that the government does not spend more money than it takes in. However, when the government reaches the debt ceiling, it can no longer borrow money needed to run the government.
America’s Debt Ceiling Crisis
Raising the debt ceiling isn’t a swift single-step process, it requires a series of steps through multiple parties, and in recent years it has been contentious. The full process looks like this:
The Treasury Department forecasts when the government will reach the debt ceiling and notifies Congress.
The President submits a request to Congress to raise the debt ceiling.
The House of Representatives and the Senate hold hearings to discuss the need to raise the debt ceiling and potential alternatives.
Both chambers of Congress vote on a bill to raise the debt ceiling.
If the bill passes both chambers, it is sent to the President for signature.
If the President signs the bill, the debt ceiling is raised.
Ultimately, it’s up to the president and Congress to agree on lifting the ceiling and by how much. Time is a factor, though. If negotiations carry out too long, the U.S. can default on its debt, yielding repercussions throughout the economy and government programs.
Impact on 401(k)s
The impact on 401(k)s is a direct one since the value of a 401(k) relies on the success of the stock market. If the government is unable to raise the debt ceiling, it may default on its debt obligations, which can lead to a loss of confidence in the U.S. economy.
This, in turn, can cause the stock market to drop, leading to a decrease in the value of 401(k)s. As a result, a default on debt obligations could lead to long-term effects on 401(k)s, as investors may be less likely to invest in the stock market in the future.
Impact on Social Security and Medicare
Social Security and Medicare are also at risk if the debt ceiling is not raised. These programs are funded by the government, and if it is unable to borrow money, it may have to cut spending on these programs. This could lead to reduced benefits for recipients of Social Security and Medicare. This could have a significant impact on seniors and those who rely on these programs for their livelihood.
Keep in mind, the debt ceiling does not affect the amount of debt the government incurs; it only limits the government’s ability to borrow more money to finance existing debt. The government can still spend money on programs such as Social Security and Medicare even if the debt ceiling is not raised. However, if the government is unable to borrow money to finance its existing debt, it may have to cut spending on these programs in order to meet its financial obligations.
The Bottom Line
While it benefits no one to see the U.S. default on its existing debt, the fact still stands that issues such as the debt ceiling are commonly used as political bargaining chips which only further complicates the proceedings.
The U.S. Treasury has since stepped in to institute necessary measures to buy Congress a few months to carry out negotiations. However, close calls are never settling, and, amid real implications for Americans’ retirement accounts and entitlement programs, it brings up many concerns as to how dependent Americans are on government debt to supplement their retirement.
Tips on Handling your Retirement
To avoid concerns such as Social Security insolvency and absent Medicare benefits, Americans need to prepare for retirement through proactive measures. A financial advisor is a wise choice when putting a strategy in place that will give you a plan of action for your financial future after your working years are past.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock/Douglas Rissing, Dilok Klaisataporn
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