The National Debt: What $36 Trillion Means for Your Retirement

In January 2025, the U.S. national debt crossed $36 trillion. That's a number so large it's essentially meaningless without context. So here's the context: that works out to roughly $260,000 per federal taxpayer. If the government sent you a bill for your share tomorrow, it would look like a mortgage — except there's no house attached.

And unlike your mortgage, this debt is growing faster every year.

The Numbers That Should Worry You

The federal government spent approximately $6.75 trillion in fiscal year 2024. Revenue was about $4.92 trillion. The deficit — the gap — was $1.83 trillion. That's roughly $5 billion per day in new borrowing.

But here's the number that keeps economists up at night: interest expense. In FY2024, the federal government paid approximately $882 billion in net interest on the national debt. That's more than the entire defense budget ($874 billion). It's more than Medicare spending. Interest payments now consume roughly 13% of all federal spending.

The Congressional Budget Office (CBO) projects that by 2034, annual interest costs will exceed $1.6 trillion — roughly 23% of projected federal revenue.

How Federal Spending Has Grown

Over the past 25 years, federal spending has grown at an average annual rate of approximately 5.8%, while GDP has grown at about 4.2% (nominal). This means the government has been growing faster than the economy that supports it. Some milestone comparisons:

What This Means for Interest Rates

Here's where it gets personal for anyone with a retirement account.

When the government borrows heavily, it competes with corporations and homebuyers for the same pool of lenders. This is called the "crowding out" effect. The more Treasury bonds the government issues, the higher interest rates must go to attract buyers.

The 10-year Treasury yield — the benchmark rate that influences mortgage rates, corporate borrowing costs, and bond prices — has been climbing. In 2020, it was around 0.9%. By early 2025, it hovered near 4.5%. Much of this increase reflects growing concerns about the debt trajectory.

Why this matters for your portfolio:

• Bond prices fall when rates rise. If you hold bond funds in your retirement account, rising interest rates mean paper losses. A bond fund with an average duration of 6 years loses roughly 6% of its value for every 1% increase in interest rates.
• Stock valuations compress. Higher interest rates mean future corporate earnings are worth less in today's dollars. The formula analysts use — discounting future cash flows — produces lower stock prices when the discount rate rises. Historically, the S&P 500's price-to-earnings ratio drops by about 1–2 points for each 1% rise in the 10-year yield.
• Mortgage and borrowing costs increase. Retirees looking to downsize or relocate face higher mortgage rates, which also depress home values in some markets.

The Fed's Dilemma: Debt Monetization

The Federal Reserve faces an uncomfortable reality. When the government can't find enough willing buyers for its bonds, the Fed can step in and buy them — effectively creating money to finance the debt. This is called debt monetization, and it's exactly what happened during 2020–2022 when the Fed's balance sheet ballooned from $4 trillion to nearly $9 trillion.

Debt monetization is essentially a hidden tax through inflation. When the Fed creates money to buy government bonds:

1. The money supply increases
2. More dollars chasing the same goods pushes prices up
3. Your savings and fixed-income investments lose purchasing power

Between 2020 and 2023, cumulative inflation eroded roughly 18% of the dollar's purchasing power. A retiree who had $500,000 in savings in 2020 needed $590,000 by 2023 just to maintain the same standard of living.

Historical Parallel: The 1940s Financial Repression

The U.S. has been here before. After World War II, national debt reached 106% of GDP (similar to today's ~120%). The government dealt with it through a policy called "financial repression" — the Fed capped interest rates on Treasury bonds below the rate of inflation. Savers earned 2% on their bonds while inflation ran at 6-8%.

The result: the government's debt shrank relative to the economy over about 25 years, but savers paid the price. In today's dollars, a retiree in 1946 with $500,000 in government bonds lost roughly $200,000 in purchasing power over the following decade.

Impact on the Bond Market

The bond market is the canary in the coal mine. Here's what to watch:

• Yield curve steepening: When long-term rates rise faster than short-term rates, it signals that the market is demanding more compensation for the risk of holding long-term government debt. This has been happening.
• Foreign buyer retreat: Foreign governments (especially China and Japan) have been reducing their Treasury holdings. In 2015, foreign entities held about 34% of U.S. debt. By 2024, that had dropped to about 23%. When foreign buyers step back, rates must rise to attract domestic buyers.
• Auction demand: Watch the "bid-to-cover ratio" at Treasury auctions. When this drops below 2.0, it signals weak demand. Several auctions in 2024 saw notably soft demand, briefly rattling markets.

What Could the Fed Do?

The Federal Reserve has a limited playbook, and none of the options are painless:

1. Allow rates to rise naturally: This controls inflation but increases government interest costs and slows the economy. Bad for stocks and real estate in the short term.
2. Monetize the debt (print money): Keeps rates artificially low but fuels inflation. Bad for savers, retirees on fixed income, and bond holders.
3. Yield curve control: Cap long-term rates like in the 1940s. This is financial repression — good for the government, bad for anyone trying to earn a return on safe investments.
4. Hope for growth: If the economy grows fast enough, the debt-to-GDP ratio shrinks naturally. This is the optimistic scenario but requires sustained 3%+ real GDP growth, which hasn't happened consistently since the 1990s.

What Should Retirees Do?

You can't control fiscal policy, but you can position your portfolio:

• Diversify beyond bonds. The traditional 60/40 stock/bond portfolio assumes bonds are "safe." In a rising-rate or inflationary environment, bonds can lose money for years. Consider Treasury Inflation-Protected Securities (TIPS), short-duration bonds, or alternatives.
• Maintain stock exposure. Stocks are a long-term inflation hedge. Companies can raise prices; bond coupons are fixed. Retirees who abandoned stocks in 2009 missed a 500%+ recovery.
• Consider I-Bonds and TIPS. Series I savings bonds and TIPS adjust for inflation automatically. They won't make you rich, but they protect purchasing power.
• Own real assets. Real estate, commodities, and infrastructure tend to hold value during inflationary periods.
• Plan for higher taxes. With debt this large, tax increases are mathematically likely at some point. Roth conversions now may protect you from higher rates later.

The Bottom Line

The national debt isn't an abstract Washington problem. It directly affects the interest rates on your bonds, the valuation of your stocks, the purchasing power of your savings, and the tax rates you'll pay in retirement. The $36 trillion elephant in the room will eventually demand a reckoning — through higher taxes, higher inflation, lower benefits, or some combination of all three.

The best defense is a diversified portfolio, realistic spending assumptions, and a plan that accounts for a range of economic scenarios — not just the rosy ones. Review your current allocation and model different scenarios with our Asset & Allocation tracker.

Sources: Congressional Budget Office, U.S. Treasury Department, Federal Reserve Economic Data (FRED). Figures cited are estimates as of early 2025.