Trump's debt plan has a hidden bombshell for seniors
For starters, the federal government really doesn't have any excess money to buy back debt. The federal budget has been running a deficit since Bill Clinton left the Oval Office, with deficits in recent years topping well over $500 billion. To repurchase debt at a discount, new debt would probably have to be issued (at a higher interest rate, mind you), essentially kicking the can down the road on meaningful debt reductions. The other option would be to ask the Federal Reserve to simply print the money, which could lead to inflation or hyperinflation that disrupts economic growth or, worse yet, leads to a steep recession or depression.
Additionally, debt issued by the U.S. government is done so with the "full faith and credit" of the United States. To consider allowing U.S. debt to get into a situation that incites a crash in bond prices would probably undermine the high quality ratings bestowed on U.S. debt and raise major red flags in the U.S. stock market and in markets around the world that look to the U.S. as a rock-solid financial leader.
But, Trump's biggest mistake might be in his assumption that buying debt at a discount would only affect foreign countries holding our debt. Based on data from FactCheck.org from March 31, 2013, more than 40% of U.S. debt was held by federal government accounts plus Federal Reserve banks. Or in other words, a lot of U.S. debt is held by programs and consumers on U.S. soil.
The single largest holder of U.S. debt is the Social Security Trust, which held 16% of outstanding national debt at the end of Q1 2013. Other federal programs holding U.S. debt include the Medicare Hospital Insurance Trust, military retirement fund, and federal civil-service retirement and disability fund.
If Trump were to consider buying back debt at a discount it would potentially reduce the investment value of the Social Security Trust, which generally invests its cash reserves in extremely safe, interest-bearing U.S. Treasury notes. Doing so could wind up hurting current and future retirees who depend on this key federal program.
This is particularly worrisome because the Social Security program is already on somewhat of a slippery slope. The 2015 Board of Trustees report has suggested that the program is on track to burn through its existing cash reserves by 2034, mainly a result of demographic shifts that include baby boomers retiring and seniors living longer than ever. This does not mean the program is going bankrupt, but it could signal that benefit cuts of up to 21% could be in store for current and/or retirees. If Trump's debt proposal were enacted, it's possible the Trust's cash reserves could be exhausted even faster.
Trump's plan is really an eye-opener
To be clear, there are no guarantees that Trump's plan would ever get the OK from Congress, or that Trump will even be in the Oval Office next year. However, his proposal does shed light on the importance of having alternative sources of income beyond just Social Security during retirement.
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Working Americans need to understand that the earlier they start saving and investing for their future, the more time and compounding will work in their favor. With the stock market having returned about 7%, on average, historically, workers who invest for four or five decades could see their money double many times over. Simply investing early and often could leave you far less reliant on Social Security when you retire.
How you invest can also be important. For example, opening or contributing to a Roth IRA can eliminate the need to pay taxes on your investment gains as long as you make only eligible withdrawals. Among retirement tools for working Americans and seniors, the Roth IRA just might be the best .
Finally, if you are planning to rely heavily on Social Security during your golden years, it's going to be in your best interest to hold off on filing for benefits for as long as possible. Although your instinct might be to claim benefits right away, doing so could leave you with a substantially reduced benefit for life. Relying on retirement accounts is preferable, but if you're still able to, going back to work until age 70 may be your best recourse. This way your working wages can cover your monthly expenses, your Social Security benefit can grow by 8% per year until age 70 to maximize your benefit, and you may even boost your eventual payment by replacing a previously lower year of earnings (Social Security payments are based on a formula that averages out your 35 highest income years).
What do you think: Is Trump's proposal feasible? Sound off in the comments below.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
