Concerned about the deficit? Start saving

January 24, 2013

| MoneyRates.com Senior Financial Analyst, CFA

The deal to avoid the fiscal cliff solved an immediate problem, but made a long-term problem worse. While the economy was spared the shock of severe tax increases and spending cuts, the deal is expected to exacerbate to growing federal deficit problem.

If that concerns you, then you might want to start saving more money. You very well might need it.

The Congressional Budget Office estimates that the deal Democrats and Republicans made to avert the fiscal cliff will add $4 trillion to the U.S. budget deficit over the next 10 years. The irony, of course, is that the fiscal cliff austerity measures were originally put in place to force Congress to address the deficit problem. Instead, they've resulted in a deal that makes that problem worse.

Controlling your own destiny

After you've e-mailed your elected representatives, screamed at the television and torn your hair out, there is little more you can do about Washington's fiscal shenanigans. However, there is one thing you can do to protect yourself from the fallout of mounting federal deficits: save more money.

Here are four possible results of rising budget deficits -- and the reason each one makes it important for you to have more personal savings:

  1. Benefits may be reduced. Everyone knows that Social Security and Medicare are on an unsustainable course, where commitments exceed their funding mechanisms. The more Congress delays addressing this problem, the more it becomes inevitable that future benefits will have to be reduced, either by limiting the size of payouts or raising the eligibility age. This means you'll need personal savings to make up the difference.
  2. Taxes may rise. Eventually, debts have to be paid. As unpopular as tax increases are, there may come a day when the government has no choice. Personal savings could help cushion this blow to your paycheck.
  3. The job market may stay sluggish. A massive deficit will restrict future government spending, creating a drag on the economy. With employment and wage prospects uncertain, personal savings can be a good safety net.
  4. Interest rates may become more rewarding. Right now, rates on savings accounts, money market accounts and even five-year CDs are all below 1 percent. That could change if the deficit isn't brought under control. Already there have been rumblings about lowering the nation's credit standing if the deficit problem isn't credibly addressed, and a lower credit rating would push interest rates higher. Of course, while this could make savings accounts pay more, it isn't the best scenario for depositors -- shaky government credit would make FDIC insurance a little less of a sure thing.

There is one possible scenario under which the deficit won't make it very rewarding to save money, and that's if policy makers decide to actively encourage inflation to effectively reduce the value of the government's existing debt. That would erode the value of your savings. But if everyone were facing fast-rising prices, having a strong reserve of savings would still be much better than not.

Your responses to ‘Concerned about the deficit? Start saving’

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Richard Barrington

14 February 2013 at 4:56 am

Well, Buckaroobanzai, I can see where the paper shuffling between the government and the Fed make it look like the deficit is all a matter of internal accounting. However, in a global economy, there are two important consequences to the deficit. First, the deficit is largely funded by the foreign investors - including sovereign nations like China - which buy US Treasury bonds. If they start to worry about America's ability to repay, borrowing costs (in the form of Treasury interest rates) would go way up. Second, as a country that imports heavily, we need a credible currency in order to be able to buy foreign goods. If the deficit gets out of hand, the dollar will lose value in the international market, causing inflation to sky rocket. In short, I wish I shared your optimism about the deficit, but I'm afraid I can't.

Buckaroobanzai

12 February 2013 at 9:33 am

““True or False?: 1. Just like a household the US government has to finance its spending out of its income or through borrowing: 2. Persistent government deficits will burden future generations with inflation and higher taxes 3. Running budget surplus now will help build up the funds necessary to help the aging population of the future. 4. Social Security is in danger of becoming insolvent because the US government will run out of money Answers: THEY ARE ALL FALSE! “The U.S. is sovereign over its currency (it makes its own money). The govt. does not need to "fund" before it can spend. The deficit is simply a "credit" balance in an account at the Fed. When the Federal Government spends it credits that account, when we pay our taxes it debits that account. The result, the deficit, is simply the score. No debt collectors are going to show up at the doorstep of the Fed to demand payment. The size of the deficit in no way inhibits the Federal Government's ability to spend dollars. Our children are not going to have pay down this amount; anymore than the Baby Boomers had to pay down the deficit incurred during World War 2 (which as a % of our economy was 2x as big) Bottom lines: 1. The US will always be able to pay it's obligations; that includes Social Security an Medicare 2. Statements from our government and business elites about fiscal cliffs and the US going bankrupt are factually incorrect and economically meaningless.”

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