Looming U.S. Debt Default Threatens 401(k) Plans

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.

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