U.S. Default May Discourage Americans From Saving, Borzi Says

July 26, 2011, 12:58 PM EDT

July 26 (Bloomberg) -- A U.S. default would be “very, very disruptive” to retirement savings and the nation’s pension system, a Labor Department official said today.

A default on debt may have a “profound effect” on the rate of savings in retirement plans such as 401(k) and individual retirement accounts, said Assistant Secretary of Labor Phyllis Borzi at a hearing in Washington today. Investors may be “less likely” to put money in them because of fears that they wouldn’t be able to easily access their funds as the result of restrictions on withdrawals from tax-deferred retirement savings, she said.

“Nothing good could come from an American default” in terms of the pension system, said Borzi. Some pension funds, particularly the larger ones, have investment policies that require them to hold AAA bonds and most of them have U.S. Treasuries, Borzi said. Fiduciaries for those plans would have to figure out how not to violate their investment guidelines if U.S. government bonds were downgraded, she said.

President Barack Obama said yesterday the U.S. may experience a “deep economic crisis” if leaders fail to reach a deal and the nation defaults, while House Speaker John Boehner said the president “wants a blank check” to keep spending. Boehner, an Ohio Republican, and the Democratic leader in the Senate, Harry Reid of Nevada, unveiled competing plans yesterday to raise the $14.3 trillion debt limit.

Borzi responded to questions about the debt limit at a hearing before the House Subcommittee on Health, Employment, Labor and Pensions on a separate issue related to the extent of fiduciary responsibility for those giving investment advice to workers with retirement accounts.

U.S. retirement assets totaled $18 trillion as of March 31, according to the Investment Company Institute in Washington. Savings in IRAs were $4.9 trillion at the end of the first quarter, while assets in 401(k)-type plans were $4.7 trillion, ICI data show.

--Editors: Alexis Leondis, Rick Levinson.

To contact the reporter on this story: Margaret Collins in New York at mcollins45@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.