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Debt doomsday imminent

By Barbara Whelehan · Bankrate.com
Friday, May 20, 2011
Posted: 2 pm ET

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.

But I fear a different type of judgment day may be fast approaching.

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:

  1. 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.
  2. 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.
  3. 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.
  4. Make corporations pay their fair share of taxes.
  5. 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?

***

Follow me on Twitter: BWhelehan

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.

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94 Comments
Thomas
July 01, 2011 at 8:35 pm

We spend nearly 10 billion dollars a day on military operations that do nothing for americans. Further, we donate billions of dollars a years to other countries. Finally, Congress pays itself way too much.

markodavid
June 29, 2011 at 5:23 pm

The U.S. debt as it stands can never be repaid.It is time to face this fact.The pretense of a raised debt ceiling is a ploy to keep interest payments flowing to the wealthy elite.This group already owns 80% + of ALL stocks,bonds and mutual funds.Let the default begin TODAY!Go back to the gold standard TOMORROW.It is time to balance the books the hard,dirty,real way and get started on a future of promise AND logic.The U.S. is a country of dumb down,fatten up and ripoff.Think you will miss all that?

Mrilluminati
June 28, 2011 at 6:35 pm

http://davidtaylorinc.com/2011/06/28/hello-world/

Federal Government Debt to Income ration is 331% or 33.1. how much longer are we going to be able to increase the debt limit? Also we spend 41 bil/m paying our debt where our monthly income is around 181 bil/m. So we don't need to default on other countries per say, instead adjust our obligations to ourselves.

John Andersen
June 28, 2011 at 8:30 am

Your article does not address the reasons why we got into debt and are continuing to go into debt. Everyone has their pet peeves about what should be cut, but generally they are not the big pieces of the pie. The largest expense by far is the entitlement programs such as welfare. We have two American traditions that are on a collision course financially. One is the idea that we should invite all the poor and needy and give them an opportunity to have a good life. The second is the idea that we should guarantee all Americans to have a base level of standard of living. We can not invite everyone in and then guarantee them all a base standard of living. These policies are bankrupting us. If every American was working instead of receiving government handouts, we would have a surplus of tax money and could pay down the debt very quickly. The advent of computers and Congress put a 3 year limit on welfare for unwed mothers resulted in a 10 year rapid expansion that resulted in a surplus of tax money. Put America back to work and we could solve our indebtedness.

wootendw
June 27, 2011 at 8:09 pm

"If Congress doesn't act, the U.S. will be forced to default on its legal obligations..."

And just what are these legal obligations, Ms Whelehan? If you are talking about Treasury bonds, there is no way the US is going to default. The Treasury takes extraordinary steps to make sure bondholders get paid what they're owed and get paid before anyone else. Maybe they will be taxed; perhaps paid with inflated dollars but they will definitely get those dollars.

Perhaps you are talking about Social Security. There is NO LEGAL REQUIREMENT to pay SS. Congress can cut it any time as well they should. Ditto for Medicare, Medicaid and Defense.

nick sal
June 27, 2011 at 11:27 am

You know Mrs. Barbara Whelanan (author of this article) I dont understand people like you, never did never will. You fall in the same category as the people in the Government who got us into this debt. You did not mention one thing about how if we dont stop being Imperealist, if the United States does not stop giving money to dictators over seas and stop Policing the world, return the over than 750 US Military bases over seas back to US soil. With all the education you had, you and so many in the US government that been to some of the best Universities money can buy, when are you going to understand that we can not finance the security of so many countries around the world. Including Isreal and South Korea, So many military bases and expenses for nothing. When are you people going to understand that??

Steven
June 27, 2011 at 12:14 am

Here's a "Must Read":

"Initial Stages of Global Stock Market Crash In Progress?" at bullbear.com.

J.M. Freidberg
June 26, 2011 at 7:25 pm

1. Withdraw from the "United Nations." (The majority of that organization are no friends of us. We can live without them.)
How much do we pay for membership in that organization? Do they pay us rent for the building they occupy? If so, maybe we should raise the rent.
2. How much have we invested in the IMF "World Bank"? What would happen if we withdrew what we have contributed?
3. Lay-off all "Czars" with paychecks over $100,000/yr.
4. Cancel 'Obamacare,' Defund the E.P.A., and "Drill Baby Drill."

Daniel L. Lieberman
June 24, 2011 at 5:34 am

Since we have a fiat currency and gold is high liquidate some of the gold reserve at Fort Knox.

Sleep Well Silver
June 22, 2011 at 12:52 am

Talk ,Talk and more Talk like a dog chasing his tail.

THE HEAD AND THE PROBLEM get rid of this and you get rid of debt. The NWO and their fiat paper out of thin air monopoly money presses all over the world controlling governments world wide threw pay outs or kick backs to control 99% of all political persons in office ,fiat reserve ,banksters ,wall street ,US military their collection agency AND PAID OFF OWNED AND CONTROLLED MAIN STREET MEDIA all over the world.

All countries have their own currency backed by silver and gold and or if they choose to back it with nothing that is their own doing if no other country excepts it they will conform fast or parrish.

Buy physical silver and gol and hold.