By now you've heard that judgment day is at hand. The rapture is scheduled to unfold on Saturday, May 21. And with all the natural disasters and global political unrest we've had lately, it doesn't seem so far-fetched.
In preparation for this event, I have made no retirement planning changes whatsoever. In fact, I expect to awaken Sunday and go about business as usual, which includes going to church and thanking the good Lord for all my blessings.
Failure to raise the debt ceiling
It's not the economic cataclysm that Timothy Geithner warned of in his letter to Sen. Michael Bennet. In there the Treasury Secretary spells out the economic consequences of failing to raise the statutory debt limit. If Congress doesn't act, the U.S. will be forced to default on its legal obligations, which in turn "would inflict catastrophic, far-reaching damage on our nation's economy, significantly reducing growth and increasing unemployment."
In the letter, Geithner paints a grim picture of the future should this default occur, even raising the specter of a return to the panic of the 2008 financial crisis. Ultimately, consumers would have to pay higher rates for mortgages, car loans, student loans and credit cards, and they'd experience "a sharp decline in household wealth." Our 401(k) plans and IRAs would take another hit, and we'd be in for a double-dip recession.
Raiding federal pensions
In the meantime, as of Monday, Geithner began dipping into federal pension funds to tide the country over until Congress gets around to raising the debt limit. He calls it a "debt issuance suspension period," but he will redeem or suspend new investments amounting to $84 billion in the Civil Service Retirement and Disability Fund, and he'll suspend reinvestment of another $130 billion in the Government Securities Investment Fund, a money market fund in the federal employees' defined contribution plan. He must take these actions to "avoid breaching the statutory debt limit." This suspension period began Monday, May 16 and will last until August 2.
Earlier this week I called Kay Bell, Bankrate's Taxes blogger, to ask why Geithner would resort to such an extraordinary measure: dipping into federal pension funds to pay the bills. "It's not the first time this has happened," she said reassuringly. "That doesn't mean you shouldn't feel outraged about it."
She's right. It has happened on five previous occasions -- 1996, 2002, 2003, 2004 and 2006. By law, the federal accounts will be reimbursed once the impasse is over. But these actions are troubling nonetheless. They're akin to borrowing money from your kid's 529 plan to pay the bills until your lenders increase your credit limit. Only much worse because of the scale of the debt.
The judgment day I fear is the one that happens after the debt limit is increased. Will Congress do something to contain and pay down this debt? We're at $14.3 trillion now. How much deeper can we go?
One trillion is a big number. If you could spend $10 million a day, it would take nearly 274 years to spend a trillion dollars at that rate. To spend $14.3 trillion would take about 3,918 years.
The American people are keenly aware of the need for reining in spending, as they're cleaning up their own household finances. And some are even willing to pay more in taxes if it means we can leave our children and grandchildren a financially sound nation in which they can flourish.
Ways to pare down debt
Maybe it's time to put forward some creative ways to whittle down at least some of the debt:
- Implement the recommendations made in the Government Accountability Office's recent 345-page report to streamline duplication, overlap and fragmentation of government services. Estimated cost savings: hundreds of billions of dollars.
- Create a claw-back provision on bonuses paid since 2009 to the Wall Street executives who were responsible for the magnitude of the 2008 financial crisis and apply that money to the national debt.
- Impose a 50 percent tax on the income of lobbyists and public relations firms whose purpose is to influence Congress and distort public opinion, the effect of which is to increase the national debt.
- Make corporations pay their fair share of taxes.
- Revert to the income tax levels that were in place before former President George W. Bush (under whose administration the debt level increased from $5.7 trillion to $10.6 trillion) took office.
An alternative: We have $9 trillion in our IRAs and defined-contribution plans, according to the Financial Research Corporation. We could donate the money to defray the national debt.
I'm being facetious on that last idea, of course.
You have any ideas?
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NOTE: An earlier version of this post stated incorrectly that the national debt level increased from $4 trillion to $10 trillion while George W. Bush held office.