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The past few years have been tough on the value of American retirement accounts. It seems there’s been nothing but headline economic news ever since the start of the 2020 pandemic.
Dramatically fluctuating employment numbers, talk of a recession and high inflation have been the focus of retirement savers in recent days. But there’s one more data point we shouldn’t overlook in the midst of everything else: America’s national debt has officially reached the $31 trillion dollar mark. That’s a staggering amount of debt.
$31 Trillion National Debt Joins Recession and Inflation Concerns in Economic News
Many retirement savers find the current economic climate worrying in regard to their hard-earned savings.
High inflation is one of their primary concerns. Prices have long since left the Federal Reserve’s 2% target in the dust and show no signs of returning. Despite three straight interest-rate hikes of 75 basis points each since June, inflation remains around 40-year highs.[1]
It’s not unreasonable to think inflation may get worse. The gasoline index may have dropped almost 5% in September, but headline inflation accelerated 0.4% following a mere 0.1% in August and no increase at all in July.[2]
And it’s possible that the falling price of gas may not last. OPEC Plus has announced they’ll be cutting oil production by two million barrels per day beginning in November. This could potentially cause the price of a barrel of oil to jump well over $100 in the coming months, according to some projections.[3]
What’s more, the Federal Reserve’s attempts to rein in inflation could cause more trouble.
The Federal Reserve has resolved to raise interest rates as much as necessary in order to pull inflation back down to 2%. The fallout from these rate hikes has had a significant impact on Americans’ savings. There are estimates that total U.S. household wealth has declined by as much as $10 trillion so far in 2022.[4] And we could see even more if the Fed sticks to its guns.
But there’s even more concerning news. On top of all that, the national debt continues to climb to record highs.
Anyone who’s been paying attention will know that a climbing national debt is nothing new, but that unceasing march upward has now officially put the number over a shocking $31 trillion.[5]
This would be appalling in any year, but it has dramatic implications in the current climate. The Fed’s view is that the stubbornness of high inflation essentially demands an ongoing increase in interest rates. As those rates are hiked, the national debt becomes even more expensive. And as the debt becomes more expensive, the far-reaching potential implications of that national burden for retirement savers become even more significant.
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National Debt Climbing at “Rate of $1 Trillion Nearly Every Quarter,” Says Economist
We’ve become somewhat desensitized to news of a rising national debt. And in my opinion, it’s worrisome that it can continue to shoot up as it has without much outcry.
“It took this nation 200 years to pile up its first trillion dollars in national debt, and since the pandemic we have been adding at the rate of 1 trillion nearly every quarter,” says Sung Won Sohn, economics professor for Loyola Marymount. That doesn’t seem like a sustainable trend.[6]
The national debt hit $30 trillion only in January, and now, not even a year later, we’ve reached the next trillion.
This rapid climb in the national debt over the last few decades suggests a blatant disregard for fiscal soundness—and if that doesn’t change, we’re likely to see even higher numbers in coming years.[8]
President Joe Biden isn’t shying away from wanton spending any more than his predecessors. The president has made public claims of deficit reduction, but estimates by the Committee for a Responsible Federal Budget (CRFB) say Biden will be responsible for having expanded the deficit by nearly $5 trillion between 2021 and 2031.[9] Projects such as the American Rescue Plan, sending aid to Ukraine, and student debt cancellation are just some of the costs that continue to drive this number forward.[10]
But a debt of $31 trillion isn’t something that can be achieved by one man alone. Presidents of either major political party haven’t given much weight to fiscal prudence in decades. There hasn’t been an annual budget surplus since Bill Clinton was president. That surplus was generated in fiscal year 1998 and remained intact through fiscal year 2001, into the beginning of the George W. Bush administration.[11] The national debt has only shrunk in three brief periods in the last 40 years: from 1998 to 1999, 1999 to 2000, and 2000 to 2001.[12]
It’s not a simple case of us-versus-them—virtually no one in any position of power shows much interest in reducing spending in any significant capacity, whether they’re Republican or Democrat. This bipartisan policy of heavy spending means it would be reasonable to expect the national debt to continue rising for the foreseeable future.
This commitment to spending isn’t the only reason the debt will continue to rise. It also costs a significant amount to manage that debt. As the Federal Reserve continues raising interest rates in an effort to contain inflation, we can expect those costs will continue to climb – and put an even bigger question mark next to the nation’s fiscal outlook.
“Interest on the National Debt Will Be the Country’s Single Biggest Expense” says Congressional Budget Office
The Congressional Budget Office (CBO) projected annual net interest costs of the debt would be $399 billion this year and total $8.1 trillion through 2032, according to May’s Budget and Economic Outlook: 2022 to 2032.[13]
Those are some incredible numbers, but even they don’t hold a candle to projections for the next three decades. The Peter G. Peterson Foundation – a nonpartisan organization devoted to raising awareness of America’s long-term fiscal challenges – notes the CBO’s outlook for the impact of interest on the federal debt through 2052 is startling. Interest payments are projected to total roughly $66 trillion. This would mean that by the year 2052, it would take 40% of all federal revenues to pay just the interest on the national debt. That would make the nation’s single biggest expense paying interest on our unfathomable debt. Money spent to service the debt will exceed what’s spent annually on defense by 2029, on Medicare by 2046, and on Social Security by 2049.[14]
These are projections from the data available in May. It’s very possible that the nation’s struggles with inflation and the rate hikes designed to fight it could accelerate these events.
The CBO’s projections say annual net interest costs on the debt will grow from $399 billion in fiscal year 2022 to $442 billion in fiscal year 2023.[15] But this projection is already outdated, according to Washington Post’s Allan Sloan and the Committee for a Responsible Federal Budget (CRFB)’s Marc Goldwein. The Fed’s rate hikes this year have already dramatically changed the fiscal environment.
According to Sloan and Goldwein, interest payments on the debt could total almost $580 billion in fiscal year 2023. As for 2024, the CBO’s projections from May have interest payments totaling $525 billion next fiscal year, while Sloan and Goldwein say those payments could end up to be an astounding $719 billion.[16]
And the rate increases will likely have effects that stretch far beyond 2024. As Allan Sloane wrote when he closed out his piece, “When the next [CBO] update comes, which typically happens in January, the interest numbers may well be high enough to knock your socks off.”[17]
Those interest numbers could be shocking on their own, but the long-term effects could be even more dramatic.
Debt Default Would Be “Catastrophic” to Economy: Treasury Secretary
There’s a potential for the national debt to cause fallout that could eventually turn into a fiscal crisis—and then a financial crisis.
If there’s a loss of confidence in the U.S. government’s ability to repay their debts, it could trigger such a fiscal crisis. In order for the government to reassure investors, they’d very likely need to pay higher rates of interest on federal debt in order to give those investors a reason to take that higher risk. Those higher interest rates could then set off more high inflation, and potentially cause the value of the dollar to decrease.[18]
An outright default on the national debt would almost certainly bring these possibilities to pass. You might remember recently when Republicans and Democrats in congress came to an impasse on the question of whether or not to raise to debt ceiling. There was quite a bit of concern that the U.S. might actually default on its debt for the first time ever. Janet Yellen, the Treasury Secretary, highlighted the seriousness of the situation, saying “the full faith and credit of the United States would be impaired” in the event of a default, which would be “a catastrophic event for our economy.” [19]
The rapidly unfolding events of a debt-cued fiscal crisis would almost immediately catalyze a financial crisis. As rates for Treasury instruments soared, the value of outstanding government securities would drop. According to the CBO, this could mean that pension funds, mutual funds, banks and other institutions holding those securities would suffer huge losses and even potentially fail. That would likely lead to worldwide financial trouble.[20]
This isn’t something that’s likely to happen tomorrow just because our debt has reached $31 trillion. But when many credible sources have so much to say about what the impact of the national debt could be in the future, it makes sense to listen.
Many retirement savers have likely already considered the need for assets that will resist the impacts of inflation over the course of their careers. But that isn’t the only economic force that could be at play in the coming decades. Personally, I think retirement savers should also think hard about how they could mitigate the damage to their savings in the event that an uncontrolled national debt proves these grim predictions true.
Sources Cited:
[1] FederalReserve.gov, “Open Market Operations” (accessed 10/20/22).
[2] Bureau of Labor Statistics, “Consumer Price Index – September 2022” (October 13, 2022, accessed 10/20/22).
[3] George Glover, Business Insider, “Goldman Sachs raises crude oil forecast to $110 a barrel after OPEC+ announces supply cuts” (October 6, 2022, accessed 10/20/22).
[4] Robert Frank, CNBC.com, “Stock market losses wipe out $9 trillion from Americans’ wealth” (September 27, 2022, accessed 10/20/22).
[5] CBSNews.com, “U.S. starts fiscal year with record $31 trillion in debt, approaching debt ceiling” (October 5, 2022, accessed 10/20/22).
[6] Ibid.
[7] Ibid.
[8] FiscalData.Treasury.gov, “What is the national debt?” (accessed 10/20/22).
[9] Glenn Kessler, Washington Post, “Biden’s unwarranted bragging about reducing the budget deficit” (September 23, 2022, accessed 10/20/22).
[10] Committee for a Responsible Federal Budget, “The Biden Administration Has Approved $4.8 Trillion of New Borrowing” (September 13, 2022, accessed 10/20/22).
[11] Kimberly Amadeo, The Balance, “President Bill Clinton’s Economic Policies” (December 24, 2020, accessed 10/20/22).
[12] FiscalData.Treasury.gov, “What is the national debt?”
[13] Congressional Budget Office, “The Budget and Economic Outlook: 2022 to 2032” (May 2022, accessed 10/20/22).
[14] Peter G. Peterson Foundation, “Higher Interest Rates Will Raise Interest Costs On The National Debt” (September 21, 2022, accessed 10/20/22).
[15] Congressional Budget Office, “The Budget and Economic Outlook: 2022 to 2032.”
[16] Allan Sloan, Washington Post, “With rising rates and rising debt, the taxpayer bill is finally coming due” (October 15, 2022, accessed 10/20/22).
[17] Sloan, “With rising rates and rising debt.”
[18] Congressional Budget Office, “The 2022 Long-Term Budget Outlook” (July 2022, accessed 10/20/22).
[19] New York Times, “Failure to Raise Debt Limit Would Be ‘Catastrophic,’ Yellen Says” (September 28, 2021, accessed 10/20/22).
[20] Congressional Budget Office, “The 2022 Long-Term Budget Outlook.”
Devlyn is director of education, the on-staff economic analyst at Augusta Precious Metals, and a member of the Harvard Business School's business analytics program. Over three decades, he has processed more than $2 billion in financial assets and now uses his experience to guide American retirement savers to diversify, hedge against inflation, and protect their retirement savings through gold IRAs.
