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The debt ceiling could hurt your 401(k). Here's what you need to know

Some estimate a default on government loans could cause the S&P 500 to drop about 22%, wiping out years of earned wealth for millions of retirees.
The debt ceiling could hurt your 401(k). Here's what you need to know
Posted at 4:36 PM, May 22, 2023

For weeks, the stock market has fluctuated dramatically due to the debt ceiling stalemate. A default could send stocks into a free fall with a direct hit to retirement savings plans.

Zach Moller, the economic program director at the center-left think tank Third Way, says time is of the essence. 

"If we are in default for a very long time, like some studies have been estimating, then yeah, a 45% drop in the stock market is entirely plausible," he said.

A Gallup Poll last year found almost two-thirds of Americans own stocks, either individually or through mutual funds and 401(k) accounts.

The success of those 401(k) accounts is tied directly to the success of the stock market.

SEE MORE: Biden, McCarthy meeting Monday for debt ceiling talks

Moller and his team estimate a default could cause the S&P 500 to drop about 22%, wiping out years of earned wealth for millions of households, particularly those nearing retirement.

"[For] a typical 401(k) for someone near retirement, which is about a quarter of a million dollars, that would be about a $20,000 drop in your assets," he said. 

Again, Moller says the financial pain depends on how long the U.S. is in default, adding that the current stalemate is economically damaging in its own right.

"The longer that we are potentially at risk of default, the more damaging that this is for confidence in the United States more broadly and for our financial institutions," he said. 

The last time the U.S. faced default was in 2011, with the Treasury reporting that retirement accounts lost $800 billion.

But, as Moller points out, many investors recouped their losses as stocks rebounded shortly after.


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