Debt Debate Could Trigger Big Losses for Retirees

Such is the conclusion of a report by the American Society of Pension Professionals & Actuaries (ASPPA), “Retirement Savings Will Suffer if Congress Does Not End the Budget and Debt Ceiling Stalemate.”

The predicted 20% drop would translate to a $2 trillion loss for private pension plans, 401(k) plans and individual retirement accounts (IRAs), researchers said. The tumble would come because most retirement assets are held in investments that likely will respond negatively to ongoing uncertainty around the economic and financial consequences of protracted debt ceiling negotiations.

ASPPA commissioned the study to analyze the effects of both the current debt ceiling fight and the previous 2011 debt limit debate, which, study researchers said, disrupted economic growth by negatively impacting three main pillars of the economy: consumer confidence, job creation and the equity markets.

Combined uncertainty in these three areas caused private pension assets to decline 26% in 2011 relative to where they would have been, researchers said, suggesting that a similar drop should be expected this fall if a compromise is not struck before the October 17 deadline.  

Looking at the Numbers

Some of the findings researchers used to draw their conclusions include the following:

• Before the debt ceiling debate during the spring and summer of 2011, economic confidence had been relatively stable. But, during the gridlock, Gallup’s Economic Confidence Index fell from -20 to -54, a decline of more than 170%.
• Net job creation had begun to increase in the first quarter of 2011, but during the debt ceiling debate job growth fell from 254,000 jobs created in April to 54,000 created the following month. Job creation numbers did not climb past 100,000 until September.
• The stock market also reacted in a strongly negative fashion, specifically in the Standard & Poor’s (S&P) 500, which responded to the debate with a 23% decline.  

The somewhat dire conclusions drawn in the ASPPA report are not believed universally. In fact, in wealth and asset management firm Northern Trust’s “Investment Manager Survey Report Third Quarter 2013,” researchers found that close to nine in 10 investment managers interviewed in September expected the political standoff over the federal government shutdown and the U.S. debt ceiling to have “at most a modest impact on U.S. equity markets.”

More on the ASPPA report can be read here. Readers looking for an alternative opinion on the debt ceiling debate can read more on Northern Trust’s investment manager outlook survey here.