The debt-ceiling vote: What it may mean to you

Man reading about what the debt-ceiling vote is and what it means for him.

The U.S. government raising their debt ceiling is a lot like you asking your credit card company for an increased spending limit. Our government owes investors (like yourself) money in the form of Treasury bonds, and to pay back those funds, the government needs to borrow more.

Recently, President Trump agreed to increase the debt limit for three more months until December 8, 2017. Most people hoped for an agreement that would solidify terms through 2018, but even longer deals are only temporary solutions. Eventually, longer-term solutions like tax changes and spending cuts will need to be discussed, each having varying impacts to investors.

U.S. debt ceiling impacts.

Why does the debt ceiling have to be raised? Because our federal government typically spends more than it takes in through tax payments. When this happens, the U.S. Treasury issues bonds to pay for that excess of spending over tax revenue. The debt ceiling is a limit, set by Congress, on the power of the U.S. Treasury to issue debt. That borrowing power provides the funds to pay for things such as Treasury bond debt, military expenses, Social Security, and Medicare and Medicaid. As the amount of debt issued by the Treasury has increased over the years, Congress has met periodically to vote to raise that ceiling and meet the Treasury’s debt obligations to investors.

As an investor with retirement goals, you might have concerns about the December debt-ceiling deadline. Having a better understanding of how this could play out and affect your retirement funds, can help you better prepare for the future.

So why should you care?

If Congress fails to expand the debt ceiling again in December, the U.S. Treasury will not have the money to pay its bills and some government activities could shut down. The credit rating of the United States, which determines the interest rate our government pays to borrow money, could be lowered, resulting in higher borrowing costs for future debt. In the short term, global financial markets could be negatively affected. Over the longer term, there’s a chance that investors might lose faith in U.S. Treasury bonds as a safe place to invest retirement savings.

While it’s likely Congress will reach a compromise, there’s always a chance for some market impacts if they don’t. And while some around you might make rash decisions, you don’t have to.  Keep your eye on the debt-ceiling situation and other market events and make informed financial decisions while keeping your long-term goals in mind.   

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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