Here we go again. Congress appears to be drifting toward yet another battle over the U.S. debt ceiling, and average investors — including retirement savers — are likely to get caught in the crossfire.
"If the U.S. defaults on its debt, it would be a very bad thing with rippling consequences," said Callie Cox, a U.S. investment analyst at the investment firm
The debt ceiling — a limit on how much the federal government can borrow to meet its obligations for Social Security, Medicare, military salaries, interest on the national debt and tax refunds, among other payments — is currently set at $31.4 trillion. That may sound like a lot, but the government will soon need more money to keep things running. Republicans, who now control the House of Representatives, have made it clear they won't raise the limit unless Democrats agree to certain spending cuts (which they have
The national debt reached its ceiling in mid-January. In response, the Treasury Department took
"Nobody really knows what could happen next," Cox said. "What we do know is that it could cause a loss of faith in the U.S. government. But what that means beyond that is hard to tell."
For retirees and near-retirees, the consequences could be dire. Government benefits could be disrupted, and retirement portfolios would likely take a big hit as the stock market reels from the news. Mary Johnson, a policy analyst at the Senior Citizens League, says the main thing she worries about is what would happen to Social Security, a federal program that around
"I think it really throws the timely payment of benefits into doubt," Johnson said. "There is no specific plan for that particular thing to happen, so there's no prioritization of who gets paid first … There's a danger that there could be either a delay in timely benefits or there could be benefits that aren't paid in full."
Then there's Medicare, which insures the health costs of almost
"There could be slowdowns in payments to [healthcare] providers," Johnson said. "One area of worry — though this is a very improbable thing — is I would sure hate to be in a Medicare Advantage plan and then get a cancellation notice because the government hasn't paid my reimbursements."
For any senior with a 401(k), there's a bigger anxiety: If the country defaults, what will happen to the stock market? Because the U.S. has never reneged on its debts, it's impossible to know. But fortunately (or unfortunately), there is a precedent that comes close to this scenario: the crisis of 2011.
Back then, like today, Democrats controlled the White House and the Senate, and Republicans controlled the House. Also like today, Republicans refused to lift the debt ceiling unless Democrats agreed to spending cuts, which they resisted. Negotiations stalled for months until July 31, when the two parties reached a deal just two days before the government would have defaulted.
If that's what we can expect this year, investors are in for a rough ride. From July to August 2011, as the deadlock continued, the S&P 500 fell by
Will 2023 be as bad as 2011? Many financial advisors doubt it.
"This looks like a game of chicken where both sides will trip over each other to be the chicken first," said Tom Siomades, the chief information officer of
Larry Luxenberg, the founder of
But what if it does happen? How can advisors guide their clients safely through the storm? Tammy Wener, a certified financial planner at
"I think the first thing is to understand their real concerns," Wener said. "For most people, that's really: How is this going to impact their ability to live their lives? How will they pay their bills, take their vacation, help family members?"
Once she's investigated that, Wener says she'll walk the client through their current financial plan, lay out some best and worst case scenarios, then make sure that in each one of them, every key expense will be covered. For especially nervous clients, she also recommends another, more concrete tactic: building up cash reserves.
"Over these next few months, before we start to see extreme volatility, maybe build up some additional cash," Wener said. "So you can help them with the concerns that they have by creating a little bit more cushion."
Above all, Wener urges transparency. When it comes to something as strange and unpredictable as the debt ceiling battle, she knows she can't put every worry to rest — and she admits that to her clients.
"We need to be honest about the fact that we don't necessarily know what is going to happen," she said.
