Photodisc/Thinkstock(WASHINGTON) -- If Congress fails to raise the U.S. debt ceiling, what will be the consequences for U.S. savers and investors?
Two economists at the Center for American Progress, a progressive advocacy group, believe the consequences could be dire. The stock market, they say, could drop by 20 percent to 30 percent. And 401(k)s, which in the past two years have rebounded from losses suffered earlier in the recession, could see those gains largely erased.
A report by financial services company Fidelity Investments found that by the end of the first quarter, the average 401(k) balance had surged past where it had been before the recession. It's exactly these gains, said the two economists, that are in jeopardy if the nation's debt ceiling isn't raised.
Heather Boushey and Christian Weller expressed their views, respectively, in testimony before Congress in July and in a May white paper.
Boushey predicts that allowing the economy to "slam into the debt ceiling will undoubtedly create an immediate economic shock," with disastrous consequences for the job market. Government, unable to borrow, would need to reduce spending immediately by 40 percent. The same shock, she believes, would trigger a sharp fall in the stock market.
"Families with 401(k)s would likely lose all the gains they have made in 2010 and much of their gains in 2009, moving them further below where they were at the end of 2007 after the stock market fell sharply," she said.
The blow would be felt most painfully by baby boomers of retirement age, since this generation, unlike previous ones, is more dependent on market-sensitive 401(k) savings than on fixed pensions.
The hit to 401(k)s, coupled with what she said would be a further decline in home prices, will deal the middle-class a double whammy. Near record-breaking unemployment rates would make it difficult for older, unemployed boomers to work their way out of their retirement hole.
Of the ongoing struggle in Congress over what to do about the debt ceiling, Boushey's colleague Weller wrote: "What may seem like an esoteric debate far removed from people's lives could in the end become a major setback for families' economic security."
Given that almost 60 percent of 401(k) money, he said, is invested in stocks, a 20 percent market drop would cost the average saver $7,911; a 30 percent drop would cost almost $12,000.
How much any individual's 401(k) would be affected by a market drop would depend, of course, on how the money had been invested.
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