Congressional Budget Office Warns of Growing U.S. Debt
Regular readers of Savings Beagle know that occasionally I diverge from the deals and savings advice to present topics related to the U.S. stock market and government spending and debt.
Why do I bother writing about such mundane and oftentimes mind-numbing topics when there are deals to discuss, credit card sign-up bonuses to highlight and savings suggestions to relate? Because they’re all interconnected to our personal finance success.
As I discuss in my quarterly stock market updates, we need the markets to provide positive annual returns – usually in the 7-8% range – to ensure many entities (government and corporate pensions, insurance companies, 401(k)s, etc.) remain solvent and increase in value. Something that’s been hit or miss in recent years, leading towards concerns that promised pension payouts will actually continue and that individual retirement accounts will increase in value enough to provide a reasonable income when work is no longer an option.
And our government spending and debt, especially when government programs such as Social Security, Medicare and Medicaid are considered, continues to move in a direction that is unsustainable.
What does that mean for you and me? Limited economic growth – fewer jobs and/or lower pay – and reductions in the payments Social Security will provide and benefits Medicare and Medicaid will offer.
Not a pretty picture.
Today, the Congressional Budget Office – a non-partisan fiscal arm of the U.S. Congress – released its 2017 Long-Term Budget Outlook, and it doesn’t provide a lot of hope for America’s future fiscal situation.
You can read the entire Outlook document here.
I thought I’d include this brief snippet from the document for those who’d rather not take the time reviewing such a lengthy piece. It can be found on page 6-7. I bolded some areas that are of particular interest to me and should be for you, too.
Greater Chance of a Fiscal Crisis. A large and continuously growing federal debt would increase the chance of a fiscal crisis in the United States. Specifically, investors might become less willing to finance federal borrowing unless they were compensated with high returns. If so, interest rates on federal debt would rise abruptly, dramatically increasing the cost of government borrowing.8 That increase would reduce the market value of outstanding government securities, and investors could lose money. The resulting losses for mutual funds, pension funds, insurance companies, banks, and other holders of government debt might be large enough to cause some financial institutions to fail, creating a fiscal crisis. An additional result would be a higher cost for private-sector borrowing because uncertainty about the government’s responses could reduce confidence in the viability of private-sector enterprises.
It is impossible for anyone to accurately predict whether or when such a fiscal crisis might occur in the United States. In particular, the debt-to-GDP ratio has no identifiable tipping point to indicate that a crisis is likely or imminent. All else being equal, however, the larger a government’s debt, the greater the risk of a fiscal crisis.
The likelihood of such a crisis also depends on conditions in the economy. If investors expect continued growth, they are generally less concerned about the government’s debt burden. Conversely, substantial debt can reinforce more generalized concern about an economy. Thus, fiscal crises around the world often have begun during recessions and, in turn, have exacerbated them.
If a fiscal crisis occurred in the United States, policymakers would have only limited—and unattractive—options for responding. The government would need to undertake some combination of three approaches: restructure the debt (that is, seek to modify the contractual terms of existing obligations), use monetary policy to raise inflation above expectations, or adopt large and abrupt spending cuts or tax increases.
The Outlook provides significantly more information and detail than what I quoted above, and I encourage you to read the entire document.
The bottom line, though, is that our elected leaders have chosen to ignore American’s financial problems for far too long. There will be consequences to this inaction. And the longer our governments fail to act, the more painful the solutions will be.
Reduced Social Security checks, less availability of health care services via the Medicare and Medicaid programs and underfunded public sector pension plans will provide less monthly income than promised.
We’re already seeing both public and private pension plans having difficulty meeting their obligations. This situation will only get worse as the years progress.
What’s the solution? Well, from a public policy perspective, there definitely are actions that can be taken now to ward off some of the negative consequences. The problem is, most are politically unpalatable. Few of our elected leaders want to tell you and me the age at which Social Security can be accessed will be going up. And they sure don’t want to say benefits will be trimmed while taxes to cover shortfalls will increase.
But that’s what’s needed.
Short of government getting its act together, and I’m not holding my breath for that, we need to be aware of the potential (very likely) consequences that we’ll be facing in the next decade and take action to mitigate those consequences as best we can.
Which means saving as much as you can of your own money for an uncertain future.
We at Savings Beagle, as always, are here to help in that regard. Much of what we offer on this site is information that will help to keep more of your own money in your pocket – oftentimes, allowing you to still have fun and enjoy much of the things others do, just at a reduced cost.
So, if you’re not already following us, don’t wait any longer to subscribe to our posts, like us on Facebook or follow us on Twitter.
We’re doing our best to make your financial future just a little brighter.
images courtesy of the Congressional Budget Office and usdebtclock.org.
