Should You Worry About $40 Trillion Debt?
By now, you have seen the headlines about U.S. gross debt breaching $40 trillion. As is the case when a market rises above a round number, it becomes an event. For me, it’s a chance to refresh my (seemingly) annual missive about deficits, debt, and how it impacts you. First, some definitions.
Deficit: The nation’s revenue (the amount of money that the government takes in), minus the amount of money that the government spends. According to the Congressional Budget Office (CBO), for the first ten months of fiscal year 2026, the federal budget deficit totaled $1.8 trillion, $169 billion more than the deficit recorded during the same period last fiscal year. Most of the spending comes from Medicare, Medicaid, Social Security, national defense, and interest on the debt.
Debt: The cumulative total amount a country must borrow to fund its annual deficit. The U.S. national debt stands at a staggering $40 trillion, $32 trillion of which is held by the public, which includes the Federal Reserve.
The balance is held by the government itself (“intragovernmental”), like Social Security and federal employee retirement funds.
The debt and deficit levels have grown substantially over the past 25 years. The most significant drivers of the increase include wars, the 2008-2009 Great Recession, the COVID-19 pandemic, which not only decreased tax revenue, but also meant a jump in government spending in the form of stimulus checks, and the Trump Administration’s Big Beautiful Bill, which cut taxes, thereby further reducing the amount of money coming into the Treasury.
Downgrades: A credit rating measures the ability of a company or a government to repay its debt. Until 2011, the U.S. maintained the highest rating from all three of the big agencies, Standard & Poor’s, Fitch, and Moody’s. During the 2011 debt ceiling standoff, S&P cut its rating (and has never restored it); in 2023, Fitch did the same; and Moody’s downgraded the U.S. last year.
How These Big Numbers Impact You
Treasury Secretary Scott Bessent and Nobel Prize winning economist Paul Krugman are strange bedfellows in this conversation. Bessent told CNBC that “there’s nothing magic about the $40 trillion number,” while Krugman noted that the $40 trillion number “has no special significance.” They of course diverge as to the causes and fixes to the nation’s finances.
The most immediate way that the country’s finances impact everyone is through interest rates. When spending outstrips revenue and there is a deficit, the Treasury has to issue more bonds to cover the shortfall. More supply of bonds, all else equal, tends to push yields up, which is exactly what is happening now. From the short-term rates that the Federal Reserve controls to the longer-term rates that are determined by supply and demand, consumers are paying more for mortgages, car loans, and credit card balances. That said, savers are the beneficiaries of higher interest rates.
One other issue worth bearing in mind is the future path of tax policy. For years, people like IRA expert Ed Slott have said that we are living in a time of historically low tax rates. In his book, The Retirement Savings Time Bomb Ticks Louder, Slott says that current tax rates “can’t remain this low. It’s simple math. Congress needs money, they’re going to have to raise the rates.” While the future might feel scary, Slott has convinced me and many others that the best way to take advantage of today’s low tax rates is to use Roth retirement plans as much as possible.
While $40 trillion is just a number, and not a magic one at that, the underlying math of deficits, debt, and future tax rates is not going away. The best course of action is a financial plan that addresses the current situation and considers your goals.