President Biden is expected to meet with congressional leaders on Tuesday about the debt ceiling, with just about two weeks until the country could run out of money to pay its bills.
Economists and administration officials have warned that a potential default on the national debt — for the first in U.S. history — would amount to financial disaster, wreaking havoc on the domestic economy and rattling global markets, too.
"Our economy would fall into a significant recession," Biden told reporters last week. "It would devastate retirement accounts, increase borrowing cost. According to Moody's, nearly 8 million Americans would lose their jobs. And our international reputation would be damaged in the extreme."
Biden expressed confidence over the weekend that leaders will strike a deal before June 1, and his administration has not yet specified what choices it would make if that doesn't happen.
A default would be felt first by Americans who receive payments either directly from the federal government or programs funded by it — like Social Security, military and veterans benefits, housing assistance and food stamps — says Samantha Sanders, the director of government affairs and advocacy at the Economic Policy Institute.
And, as she told NPR's Weekend Edition Sunday, the economic effects would ripple outward from there.
People in low- and medium-income ranges could struggle to pay their bills and cut back on spending. The Treasury could delay payments, rattling financial markets and wiping out household wealth. And people could see higher rates for things like mortgages and credit card interest.
"This is going to sound a little bit depressing, but honestly, there's very little an ordinary person can do to prepare for a financial crisis at that scale," Sanders said, adding that the most productive action people can take now is lobbying their members of Congress for a clean debt ceiling deal.
And what exactly does the debt ceiling have to do with retirement plans? Morning Edition's A Martínez asked Joel Dickson, the global head of advice methodology at the investment firm Vanguard.
Dickson says it's clear that there will be increased market volatility as the threat of a default gets closer and if it comes to pass.
"But whether that volatility actually manifests itself in lower or higher returns at any given point in time is really not under an investor's control and it's really, really hard to predict," he says.
Some experts have tried to put a finer point on it. Center-left think tank Third Way said in a December report that a typical worker near retirement with 401(k) savings could lose $20,000 if the U.S. were to default on its debt.
Remember that retirement savings are about the long-term
Dickson, however, emphasizes that saving for retirement is a long game, and a temporary disruption is not likely to have a long-term effect on those savings.
And while the average investor can't necessarily dictate what will happen to the market or in the debt ceiling standoff, they can make sure they're not putting all their eggs in one basket.
"The best way for investors to achieve their own success is by focusing on the things that they can control: saving regularly, keeping costs and taxes from eating away at your nest egg and knowing what you need to meet your goal," Dickson says. "Sticking to that plan and controlling what you can is the best way for success."
If you'd been planning to retire sooner, like this year, Dickson says there are some other issues to consider. If there's a default and government payments do get delayed, that would affect the cash flow you're used to receiving — and, in a sense, the income that you're used to spending.
"And that's where we talk about the importance [of] preparing for the unexpected," Dickson says, referring to peoples' overall investing plans. "Think about things like having rainy day funds or backup plans."
The same idea applies to people who are already in retirement, he adds, since those accounts are by their very nature used to pay for daily expenses and annual living.
"But there may be different ways to think about withdrawing your account in inflationary periods or in times when markets are down," he adds. "That's having a well-diversified approach to spending, the timing of it and how you're saving for the longer term, and then drawing that down."
The broadcast interview was produced by Shelby Hawkins and Taylor Haney.
A MARTÍNEZ, HOST:
President Biden and congressional leaders are set to meet tomorrow over the debt ceiling. A possible default is about two weeks away, and Biden calls that prospect catastrophic.
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PRESIDENT JOE BIDEN: Our economy would fall into a significant recession. It would devastate retirement accounts, increase borrowing costs. According to Moody's, nearly 8 million Americans would lose their jobs.
MARTÍNEZ: Devastate retirement accounts - we wanted to zoom in on that part. So we called Joel Dickson. He's the global head of advice methodology at the investment firm Vanguard. Joel, what does one thing have to do with the other, the ability to pay the nation's debts and retirement accounts?
JOEL DICKSON: Well, that question has really been what we've been hearing, too, directly from our clients. You know, the relationship of credit, the ability for the U.S. government to finance its own investments and for their - then investors and businesses, their financing costs and their ability to invest is at risk or at - in question with, you know, the debt crisis looming. So investors should definitely...
MARTÍNEZ: But why, Joel? I mean, everything I've put away, is that all of a sudden going to be used to pay for something else? Or, I mean, what am I doing here?
DICKSON: No, not in that form.
DICKSON: I think what is certain is going to be that there is going to be increased market volatility as we get closer and closer to the debt ceiling and raising the debt limit and certainly in the event of a default. But whether that volatility actually manifests itself in lower or higher returns at any given point in time is really not under an investor's control and is really, really hard to predict.
MARTÍNEZ: So how does your firm - a firm like yours prepare to protect its customers?
DICKSON: Yeah, so there are a number of ways. One is in just kind of reminding investors to think about the long-term perspective. Most retirement savings is about saving over the long term. And shorter-term market events, like a temporary - what we would expect to be a temporary, you know, blip, if you will, in the debt issues, likely, when you zoom out, does not have a significant longer-term effect on retirement savings. Not to say there wouldn't be disruption. There certainly would be because investors should definitely be prepared for potentially significant volatility as we get closer to the deadline.
MARTÍNEZ: So say if you're in your 50s and you're looking to retire, say, in 10 or 15 years, you've got to kind of keep the long game in mind.
DICKSON: Absolutely. I mean, the best way for investors to achieve their own success is by focusing on the things that they can control, saving regularly, keeping costs and taxes from eating away at your nest egg and knowing what you need to meet your goals. Sticking to that plan and controlling what you can is the best way for success. When it talk about investing, the markets, market returns, what's happening in the political environment is not really under an investor's control. And so there, it's about not putting all of your eggs in one basket so that you're able to withstand many possible outcomes because we don't know or can't control what happens there.
MARTÍNEZ: But what if I was planning on retiring this year. After working a lifetime, Joel, I'm planning on retiring this year. What do I do?
DICKSON: So that's where I do think there are some other issues that you need to think through. If, however, we're talking about your end retirement, well, that's the very nature of retirement accounts, is you're using it often to pay for your daily expenses and your annual living. But there may be different ways to think about withdrawing your accounts in inflationary periods or in times when markets are down. Again, that's having a well-diversified approach to spending, the timing of it and how you're saving for the longer term and then drawing that down.
MARTÍNEZ: Joel, regrettably, I'm going to have to leave it right there. Joel Dickson at the investment firm Vanguard. Joel, thanks.
DICKSON: Thanks, A. Transcript provided by NPR, Copyright NPR.