A research group looked at the consequences for a student financing college, a family buying a home and a Social Security recipient
The national debt just topped $40 trillion. What does that mean for you and your wallet?
The U.S. federal government's total debt has surpassed $40 trillion, as a tracker from the Treasury Department put it above that big milestone on Wednesday.
The national debt is often discussed in terms of "macroeconomic measures that feel distant from everyday life," but it has real-world consequences for Americans, including for students financing college, families buying homes and retirees relying on Social Security, according to a report that came out Tuesday from the Conference Board as the milestone neared.
The report looked at a business-as-usual scenario where annual deficits remain at around 6% to 7% of U.S. gross domestic product, a good case where they fall to 3% of GDP, and a bad case where they rise to 9% - and then estimated the impact of those scenarios on big life decisions such as taking out a student loan, purchasing a home or starting to collect full Social Security benefits.
It emphasized that interest rates tend to rise with the national debt, as investors demand higher rates BX:TMUBMUSD10Y due to the higher risks associated with government debt.
For a student who needs to borrow $45,000 to finance college and an additional $30,000 for graduate school, reducing deficits under the good-case scenario leads to an overall decrease in student-loan payments of about $14,000, in comparison with the business-as-usual scenario.
The bad-case scenario leads to an overall rise in student-loan payments of about $16,000, and if there's a one-week government default, there would be an increase of $44,000, according to the Conference Board, a nonpartisan business research organization. If there were an extreme interest-rate shock, with rates doubling from the baseline scenario, payments would rise by $310,000.
For a family of four buying a home worth $600,000, total mortgage payments under the good-case scenario would be lower by about $53,000, in comparison with the business-as-usual scenario. For the bad-case scenario, total mortgage payments would be higher by $55,000, and a one-week default would deliver an increase of $133,000, while the extreme rate-shock scenario would result in an increase of $760,000.
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In the case of a 67-year-old American who plans to retire this year and begin collecting full Social Security benefits, the Conference Board's report said the retiree faces a monthly benefit cut of $173 in 2032 and cuts of more than $700 in subsequent years. That's because the main trust fund for Social Security is expected to become insolvent in 2032.
Congress has the option to backfill that trust fund to eliminate or lessen Social Security benefit cuts - but that could increase the annual deficit and deliver "the precise dynamics present in the bad-case scenario with higher interest rates and costs for consumer loans," the research organization's report said.
The Conference Board recommended that U.S. lawmakers address the growing national debt by establishing a bipartisan fiscal commission that's charged with shifting the debt-to-GDP ratio toward a more sustainable level and tackling the solvency of Social Security's and Medicare's trust funds. It also is calling for reforming the congressional budget process.
The Committee for a Responsible Federal Budget, a watchdog group, called for similar actions on Wednesday.
"Whatever motivation our elected officials need to find to finally take action - whether the worries of their constituents back home, the alarm signaled by financial markets, competition from abroad, or the consequences of failing to act - they ought to find it soon," said CRFB President Maya MacGuineas in a statement. "No one knows how many more of these milestones America can take."
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-Victor Reklaitis
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