Increasing national debt can influence American workers’ growing 401(k) retirement accounts by affecting stock market stability, interest rates, and overall economic conditions.
Other impacts of policy-making around the national debt can include effects on Social Security, Medicare and Medicaid.
Bestselling author and New York University professor Scott Galloway warns Americans about the growing importance of prioritizing the task of getting that debt under control in the near future.
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When concerns about the national debt increase, investors often become more cautious, leading to stock market declines.
Because 401(k) plans are largely invested in stocks, any downturn in the market can reduce the value of retirement savings. Periods of uncertainty or economic instability linked to government debt can cause fluctuations in stock prices, which can negatively impact investment portfolios.
For long-term investors, these declines may recover over time, but short-term losses can be unsettling for U.S. workers nearing retirement whose savings and investments are heavy in 401(k)s.
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Another consequence of rising national debt is the potential for higher borrowing costs. If the government struggles to manage its debt, interest rates may rise, making borrowing more expensive for businesses and individuals.
Higher interest rates can slow economic growth, as companies may have less capital to expand, leading to lower profits and stock performance.
Again, because 401(k) plans are tied to corporate stock values, a sluggish economy can translate into weaker investment returns, affecting retirement savings.
Galloway provides some key thoughts on the national debt and the trouble he sees the U.S. approaching.
A retired couple is seen holding hands and walking on a beach. Scott Galloway warns Americans about the U.S. national debt crisis. Implications of the growing problem can affect people’s retirement investments, including 401(k) plans.
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Scott Galloway explains his warning on the U.S. economy, national debt
Galloway highlights historian Niall Ferguson’s observation that when a major power allocates more money to servicing its debt than to national defense, it risks losing its status as a dominant force.
Over time, escalating interest payments can consume financial resources, leaving little room for essential functions such as military readiness, pandemic response, infrastructure development, and social welfare programs.
In fiscal year 2024, the U.S. budget allocated $877 billion for defense, while $878 billion was designated for debt interest payments.
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Galloway emphasizes Ferguson’s argument that the U.S. is confronting a debt crisis reminiscent of those that played a role in the declines of the Spanish, French, and British empires.
The weight of excessive borrowing, he suggests, could create economic vulnerabilities similar to those that led to the unraveling of past global powers.
“As I previously wrote, countries typically are not conquered — they go broke,” Galloway warned. “America is up against it.”
“Reigning in our debt should be a national priority, but it isn’t, Galloway continued.
On May 22, the House of Representatives passed the “One Big Beautiful Bill Act,” reinforcing 2017 tax cuts and adding new reductions. Before reaching the Senate, lawmakers are expected to propose significant changes.
Some Republican senators, citing concerns about the legislation’s impact on national debt increases, seek modifications. As debate continues, the bill faces uncertainty regarding its final form and approval. Its future remains in flux.
Related: Dave Ramsey sounds alarm for Americans on Social Security
Other implications on national debt policy for 401(k)s, Social Security, Medicare, Medicaid
Political debates over various aspects of the debt can also create economic uncertainty, which can lead to short-term market instability — a major factor with the potential to affect 401(k) plans.
In past debt ceiling disputes, investors have reacted negatively to the possibility of government default or spending cuts, causing stock markets to decline sharply.
When the market experiences volatility due to these concerns, retirement accounts can see sudden drops in value. While markets often rebound once debt ceiling negotiations are settled, these fluctuations can be troubling for those relying on their 401(k) for fiancial security during retirement.
Government efforts to control national debt may also result in spending cuts that affect retirement planning.
Programs such as Social Security, Medicare and Medicaid, which many retirees depend on, could see reductions if lawmakers prioritize debt reduction.
Changes to these programs may require people to adjust their retirement plans, possibly saving more or delaying retirement.
“When the adults show up we should have a serious sit-down re closing the fiscal gap — the amount the government needs to raise taxes and / or cut spending, as a share of GDP, to stabilize our fiscal health,” Galloway wrote.
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