Nobody knows exactly what will happen if Congress and the Obama administration fail to reach an agreement to raise the debt ceiling by the current Oct. 17 deadline. But one group is now putting a price tag on what it would cost retirement savers. In a report released today, the American Society of Pension Professionals & Actuaries (ASPPA) said that the value of Americans’ retirement savings could drop by more than 20% over a period of several months in the event of a default – representing a loss of over $2 trillion from employer-based pension plans, 401(k) plans and IRAs.
“This isn’t Wall Street, this is Main Street,” said ASPPA CEO Brian Graff, describing the parties whose assets would be lost. “The real tragedy is allowing their retirement security to become another casualty of political failures.”
Graff said the ASPPA report reached its conclusions by looking at the economic impact of the debt limit debate in the summer of 2011 and the economic disruption that followed. That debate didn’t end in default. But all the same, according to the organization’s report, “Private pension assets declined an additional 26% relative to where they would have been.”
Graff says he thinks the economy and savers’ balances are still worse off today than they would have been without the 2011 conflict. A default today, he says, would force many people to change their retirement strategy and retire later than they planned.
Of course, after the 2011 standoff, markets did bounce back—and an investor who sold in dismay during that impasse might have missed out some of the ensuing gains. Laurie Nordquist, director of institutional retirement & trust at Wells Fargo, offers a longer term perspective. She notes that investors who focus on long term planning fare better than those with “knee-jerk” reactions to market events.
“Predicting when to get in and out of the market is really not good,” she said. “Participants in a 401(k) plan need to focus on the best allocation for the long run.”