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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
RR
July 08, 2011 at 5:53 pm

halve welfare and foodstamps now, and abolish in a year. legalize pot and release from prison all pot-related non-violents.

enact the fairtax - national sales tax gets money from criminals, illegals, internet transactions, and everyone else. so unfair that law-abiding working citizens have to support everything

humans can't be trusted not to be as greedy as they can get away with, so make sure they can't get away with too much. and don't give anyone free money ever, never a good idea and nearly never truly appeciated or put to good use.

Jack Y.
July 08, 2011 at 5:35 pm

I get a kick out of the suggestion that "corporations
should pay their fair share."

Uh, its corporations who provide us with jobs.

Uh, its government that is parasitic upon us.

Government has ruined us as a people & a country.

Time to cut government back and back and back.
Time for bureaucrats to shut up & resign.
Time for the lame politicians to stop spending our $.

Government parasites cannot survive without our hard
work. And they lack the courage to admit that.

Molly
July 07, 2011 at 9:22 pm

Do away with subsidies and all of the HUD, farm, etc, do away with grants, that is just a way of giving money to someone who hasn't earned it. The Rockefellers if I recall my history, are one of the biggest benificiaries. They loaned the government money at 6% I believe it was, to fix a bunch of apartments in NY, well they got them fixed and nobody could afford them. It is kind of like the housing bubble, all these TV shows about granite countertops and such, then the banks making people loans for these houses with granite counter tops and 5 bedrooms, 3 baths to people that could only afford 3 bedroom 1 bath and formica countertop, and we bail out the banks? The auto bailout and the fuel effient rebates, well they just took away the used cars, for the ones that buy what they can afford, the amount of energy savings was minimal, if any. It took that one step up from the people with the old beater trucks, the ones that know they can't afford the payments, it took their next step up away, so the really old trucks stay on the road even longer. Foolish waste of money. Foolish destruction on ASSETS. Foolish onslot of greed fed pipedreams, and we wonder why the country is in danger of going bankrupt. Just like the state of the union, when he said a college degree makes you worth $1,000,000, more, from the campaign contributions, it just makes you a better briber or beggar with a hand out to Uncle Sam.

seppe
July 06, 2011 at 1:21 am

HI,i have no problem in paying more taxes,but i don't think that it's the solution,the problem that i see it's the way we go about the revenue,for one the elected people must go to private life after they have served their time in office, with no residual income and no perk's in any form or shape from the elected position,second,downsize the government body,i see no reason to have that many representative wend everything its down to a two single specimens which are the majority and minority leather,third voting in the house or the senate should be SECRET,just like people voting on election day,third,the lobby should be treated as a pest on farmers crop,fourth,taxation should be lineal just like if you drive five mile you will pay x amount ,but if you drive fifty mile you will pay that many x amount it is all up to you,just like paying hi way toll,pay as you go,meaning,if you eat one steak you pay one tax if eat two steak you pay double tax,is that simple,and that should be across the entire population from the janitor people to the president.fifth taxes should be use to secure and maintain order in our land and not to interfere with other land or way of life any were else based on our perception on how thing should be.TAX VIOLATORS ARE CRIMINALS NO EXCEPTION.

Steve
July 05, 2011 at 9:05 pm

Simple. Create a Series "F" government savings bond program. Make it so that people can cash out of their 401, 403, and other retirement programs tax free and put the money into these bonds yielding a 5% interest rate. Bond held to maturity are not taxed. Make maturities 20 years.

Steve
July 05, 2011 at 6:09 pm

> 30% of tax revenue is lost through unreported cash transactions... get rid of all cash. All transactions electronic.
> 10% flat tax rate... period. No deductions, No loopholes. You make 10 billion, you pay a billion, you make a dollar you pay a dime. Individuals and corporations.
> All public representatives must abide by all bills they pass into law. No more gravy train. No "full pay for life" after a single term, either.
> Get back to national defense, not national offense.
> Any spending project over 100 billion is put to national referendum.
> Work for welfare.
> Sell off nationally held lands.
> Tariff unfair trade countries... you know who you are.

MIke
July 05, 2011 at 5:42 pm

Go to 6 year terms for pres and senators. why? whenever someone of courage steps up to offer a plan, the other side simply scares seniors knowing they vote and are a growing % of the population.

a one term president and senate would know they can't kennedy or schmuer their way to re-election via self adulating tactics that are selfish and narcisstic

Eric K
July 05, 2011 at 1:47 pm

Ms. Whelehan puts forward five "creative ways" to cut down the debt. One is "eliminate duplicative government programs". The other four are "raise taxes".

Here's an obvious one that doesn't seem to have occurred to her:

Cut government spending!

Russ
July 05, 2011 at 9:58 am

Just 51% of taxpayers DON'T PAY federal income taxes....100% of people working should be paying federal income taxes including illegals and welfare recipients. And probably everything else Ed posted.

Ed
July 04, 2011 at 11:05 pm

Double the tax on all attorneys starting with the guy in the white house. Close all foreign bases. Legalize and tax all controlled substances, close down 2/3rd of the Dea and half the DOJ. Put the TSA gropers on the borders to violate smugglers and illegals. Make those collecting welfare, roof, do concrete work, and pick agricultural products (do all the work illegals do) Make all swap transactions illegal except for physical settlements. Raise margin calls on speculatiors by 30%. Regulate the he'll out of insurance companies. Federal standard on portable insurance, all types. Tax charities and churches that do not give away 70% of collections to the community. Offshore tax dodging should hold all company officers personally accountable.