If Congress fails to raise the debt limit, the 401(k) accounts of U.S. workers could fall by as much as 20 percent because of tumult in financial markets, according to a study by the American Society of Pension Professionals and Actuaries.
"As if the uncertainty of this all too familiar crisis weren't enough for America's workers and retirees, the real tragedy is in allowing their retirement security to become another casualty of political failures by Congress and the Administration," the ASPPA's executive director and CEO, Brian Graff, said in a statement.
Of the $20.9 trillion in retirement savings at the end of the second quarter, $11.1 were held in private employer-sponsored defined contribution plans. Should Congress fail to act, those accounts could lose more than $2 trillion of their value, the ASPPA said.
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Five reasons, formulated by Matthew Zames, a JPMorgan Chase managing director who participated in the 2011 debt ceiling negotiations, were cited in the report for the potential for such huge losses in retirement accounts:
- Foreign investors will sell their existing holdings of Treasury debt and refuse to purchase future securities.
- Delays in increasing the debt ceiling (and a default) could lead to a downgrade of the U.S. sovereign credit rating.
- Loss in consumer economic confidence could trigger a run on money-market funds.
- Default or long delays in increasing the debt ceiling could lead to a sharp drop in lending from disruptions in the Treasury financing market.
- Increased borrowing costs and credit contractions will have damaging effects on the still-recovering economy.
"Delays in resolving the budget impasse and failing to address the debt ceiling will, without question, significantly slow economic growth and erode private pension assets," the report said.
Even the suggestion of not raising the debt ceiling has caused problems for markets and the economy in general. During the 2011 negotiations, the report said, job growth dropped from 254,000 created in April of that year to 54,000 in May and took five months to recover to the higher level. At the same time, the Standard & Poor's 500 fell 23 percent and did not recover for seven months.
The same dynamic has been seen since the government shutdown began last week and fears of Congress not raising the debt ceiling took hold. The Dow Jones Industrial Average fell earlier this week but then rebounded sharply as word of a possible deal to raise the debt limit spread on Thursday.
"We know that financial markets do not respond well to uncertainty," the report said. "Yet, we do not know exactly how they would respond to the potential debt ceiling impasse and default. What is known is that it will precipitate a downturn in financial markets that will surpass the impact of the 2011 debt ceiling debate."
Public pension funds, which have moved more of their assets into alternatives investments, still rely on public equity as the largest driver of returns. The potential for stock market losses comes while all retirement plans are recovering from the recession.
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