Guest Opinions

National debt keeps you from getting interest on your savings

Robert Bakes
Robert Bakes

Have you looked at your bank or credit union statement recently? Not too many years ago you would have been earning 3 to 4 percent interest. Now savings accounts, 401(k) and pension plans are returning little or nothing. Essentially zero after inflation. So what has caused this decline in investment and retirement income? If you guessed “global warming,” it would be wrong, although a lot of people would have agreed with you. Global warming seems to get credit for much of the ills of our society. But if you guessed that it is caused by the nearly $20 trillion national debt, you would be spot on. Here’s why.

When the recession began in 2008, the government began running huge deficits, borrowing not billions but trillions of dollars to bail out banks, insurance companies and car manufacturers in an effort to jump-start the economy. As a result the national debt increased from $8-9 trillion in 2007 to $20 trillion, and the Federal Reserve lowered interest rates to near zero.

How does this affect individual savings and retirement investments? Retirees are currently getting hardly any savings or investment income. If that were only temporary it wouldn’t create a crisis. But unfortunately it will be permanent for the following reason.

The government must pay interest on the $20 trillion debt. With interest on government debt currently at about 1 percent, it costs the government $200 billion interest each year, which must come out of the tax revenues, or be borrowed, which increases the debt further. Each 1 percent interest that the Fed increases interest rates will take another $200 billion from the government’s revenues (1 percent x $20 trillion = $200 billion). If interest rates went up to the historical average of 5-6 percent, it would cost the Treasury over a trillion dollars (5 percent x $20 trillion = $1 trillion). In the 1980s interest rates went up to 12-15 percent. The government can’t pay that kind of interest, so the Fed will be forced to hold interest rates at or near 0-1 percent.

With interest on government borrowing stuck at 0-1 percent, savings accounts, 401(k)s and pension funds will not be able to provide any significant interest or investment income. The same applies to Social Security and Medicare, whose funds are invested in government bonds (borrowed by the government).

In sum, the $20 trillion national debt has created a catch-22. The Fed can’t permit interest rates to increase because the government can’t pay the interest, and as a result saving and retirement investments won’t generate enough return to support retirement.

The problem won’t go away by ignoring it, as Congress and the last two presidents have done. The $20 trillion national debt, like global warming, is probably going to be with us forever. The question is: Can we learn to live with it?

Robert E. Bakes is a retired chief justice, Idaho Supreme Court, and lives in Eagle.