Government spending increased by 13% in the past six months, while revenues fell by 3%. Contributing factors included an 11% bump in mandatory spending programs — like Social Security and Medicare — and a 41% spike in interest outlays on public debt.
With the nation facing higher interest rates, the deficit could continue to balloon as the government works to pay it off. The U.S. Government Accountability Office projects that national debt will continue to grow faster than the economy. And that could lead to serious economic, security and social challenges.
Here are some ways you can protect yourself from potential economic instability.
Prepare for reduced benefits
Social Security and Medicare are major components of the federal budget.
But if the federal deficit continues to grow, it's possible that policymakers may consider reducing benefits or making other changes to the programs. The Social Security Trust Fund is projected to be depleted by 2034, which could lead to a 24% reduction in benefits if no action is taken to address the shortfall.
To soften the blow of any future benefit cuts, individuals can contribute more to their retirement savings now. This includes options such as increasing contributions to a 401(k) or IRA. By doing so, individuals can build a larger retirement nest egg that can provide an additional source of income in retirement.
Opening a Health Savings Account (HSA) can also provide a financial cushion for future medical expenses. HSAs are tax-advantaged accounts that let individuals save pre-tax dollars to pay for qualified medical expenses. Any unused funds in the account roll over from year to year and can continue to grow tax-free, providing a potential source of funds for future medical expenses.
Prepare for higher interest rates
Paying down debt can be a smart financial decision, especially during times of economic uncertainty. Studies have shown that reducing personal debt can help to minimize financial risk and increase financial stability.
One study by the National Bureau of Economic Research found that households with higher levels of debt are more likely to experience financial distress during times of economic hardship.
