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The national debt is climbing with no end in sight. Government debt currently tops $21 trillion. The national debt has increased more than 375 percent since George W. Bush took office in 2001. Projections place the debt at nearly $25 trillion by June 2022. That is another $4 trillion in only four years.
That’s a lot of money, but what does it mean to your retirement? Well, it depends.
On one hand, high national debt tends to keep inflation low, so you’ll need to save less money to retire comfortably than if inflation were high.
As a general rule, low interest rates hurt savers but help the government. In past years, the government has spent 13 percent of the budget servicing debt. Today, that number is only 7.4 percent of the budget. Fewer dollars are spent on the debt today than 15 years ago. Think of it as refinancing your home with a lower interest rate but taking out all of your equity. You have a lower payment, but a higher debt balance.
Low interest rates help companies, especially those looking to expand and grow their businesses. It’s less expensive for them to borrow money and to issue their own debt in the form of bonds. That’s great news if you’re 30 years old and not planning on retiring for another 35 years. It’s bad news if you’d like to retire in the near future.
If you have already saved enough to retire, the high level of national debt could be a good thing! It is unfortunate if you need to save more.
However, some financial experts believe that the current national debt does not affect the stability of the economy. Here’s their reasoning:
◗ The U.S. can afford its debt. Is a $50 million mortgage too expensive? It is if you only earn $1 million per year. It is barely as bothersome as a single mosquito if you are worth billions.
Looking at other countries with fragile economies, debt loads become an issue when servicing them exceeds 5 percent of gross domestic product. In March of this year, the U.S. debt-servicing cost was $263 billion, or only 1.4 percent of GDP.
The debt-servicing cost would have to triple at the current level of U.S. production to become an issue.
◗ U.S. companies and citizens own the majority of the debt. American concerns own two-thirds of the debt. In the end, most of the debt payments end up in the United States. You may have heard that China owns a lot of U.S. debt, but its share amounts to less than 6 percent.
◗ The government can always issue new debt to pay back old debt. The rolling of debt is a common practice. While it is challenging for the average person to put off their debt indefinitely, the government can pull this off quite easily, provided it can maintain the debt-servicing below 5 percent of GDP.
This does not mean that saving for retirement in the current economic climate will be easy. It may be necessary to re-evaluate your retirement plans. Spending less and saving more has never been more important. There is also the option of taking on more risk in your investments, or adopting investment strategies that attempt to mitigate severe market downturns for those still invested in equities.
The overall economy is safe. The current level of debt is not an issue for concern, yet. But one only needs to look at the economies of countries like Greece and Argentina to see what can happen when debt exceeds safe levels.•
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Paul Coan is managing member of Raton Wealth.
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