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According to a new Pew Research Center survey of 1,007 Americans, “As the debate over the nation’s debt and deficit continues, the public has grown more concerned that failing to raise the debt limit would force the government into default and hurt the economy. Despite this change, however, about as many Americans are concerned by the consequences of raising the nation’s debt limit as by the fallout from not doing so.”
What’s all the media fuss about related to the debt ceiling? As a quick reminder, the federal government spends more than it takes in each year (“deficit spending”) and so must borrow the remainder from anyone willing to invest in Treasury bills, notes and bonds. Investors include you and me, mutual funds, and other countries such as China. In 1939 all federal debt was combined for the purposes of calculating the debt limit. Another way to think about it is that Congress has authorized the Treasury Department to borrow money (via the sale of bonds) to support government programs and operations until the total debt hits the ceiling.
In February of 2010 (just last year!) the ceiling was raised to $14.294 trillion.
According to the Treasury Secretary, August 2, 2011 is the date on which dramatic action will be required if the limit is not increased prior. “Nearly half of all government checks won’t go out: The Treasury Department would be unable to pay between 40% and 45% of the 80 million payments it needs to make every month, according to an analysis by the Bipartisan Policy Center.”
With the deadline looming, why would 47% of those surveyed in the Pew survey above still not want to raise the debt ceiling? Of those 47%, the most cited reason for not raising the ceiling is that government spending would continue to rise (thus further increasing the federal debt). Interestingly, those voters not affiliated with any political party (Independents) are now roughly equally split between raising the debt ceiling and keeping it where it is now.
So, how will the debate and ultimate conclusion (I believe that the ceiling will be raised before August 2) affect your retirement? Higher taxes must someday be imposed just to balance the math of entitlement spending growth (Medicare, Medicaid, and Social Security). While your Social Security checks are safe (as long as you qualify for Social Security), you’ll need to save, save, save for retirement. Use the “Rule of 20” – you can retire from everyday work and income only when you have 20 years of annual spending in a reasonably balanced investment portfolio. That’s 20 times your annual spending, not your pre-tax or after-tax income. See your certified investment advisor (or get one if you don’t have one now) to start on the road to retirement planning and saving.