By Hal M. Bundrick
NEW YORK (MainStreet) ¿ The debt deadlock in Washington, D.C. may take a significant toll on American retirement plans. If the debt ceiling is not raised and the U.S. defaults on its outstanding payables, 401(k) plans could suffer losses in the trillions of dollars, according to the American Society of Pension Professionals & Actuaries (ASPPA).
"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," said Brian Graff, the ASPPA's executive director and CEO.
Comparing the current economic threat with the impact of the similar debt crisis in 2011, the study found employer sponsored retirement plans could suffer losses of 20% or more as a result of a U.S. default.
"These losses could deplete pension assets, creating adverse conditions for retirement savings," the ASPPA said in a statement released with the study. "Each financial shock absorbed by private pension investment affects the retirement decisions and financial security of plan participants. 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."
According to the study, the debt ceiling debate of 2011 "seriously disrupted the economy, shrank total private pension assets and slowed the nation's economic recovery."
The organization's research indicates that during the months following the 2011 debt ceiling negotiations, along with the resulting downgrade of the U.S. credit rating, private pension assets declined an estimated 26% over their projected growth trajectory. The losses reflect the cumulative effect of the market valuation decline and the loss in earnings associated with that decline.
The ASPPA says retirement savings totaled $20.9 trillion as of the end of the second quarter 2013, with nearly $11.1 trillion in employer-sponsored defined contribution plans and individual retirement arrangements.
The study estimates retirement savings could experience losses exceeding $2.4 trillion, an amount exceeding 20%.
"Based on past experience, this current impasse predicts significant disruption to financial markets and yet another significant risk to retirement security," the ASPPA says.
These losses would be on top of the pain retirement plans have already suffered during the recent economic recession, when private pension assets lost approximately $1.7 trillion -- nearly 30% in value -- according to the Urban Institute.
"ASPPA strongly encourages Congress and the White House to keep working Americans' retirement plans in mind and act quickly to resolve the debt ceiling debate," the organization says. "Extending the conflict could unnecessarily risk America's retirement security."
--Written by Hal M. Bundrick for MainStreet