In Depth: The debt ceiling explained and how it could affect your wallet
On Thursday the country hit its $31.4 trillion debt ceiling. So what does that really mean? Let’s go in depth.
Reaching the debt ceiling really won’t change much for the government for now. It’s important to note that the federal government always runs a budget deficit. It does not take in enough money through taxes and other revenue to pay government salaries and run operations.
If you and I ran our households the same way, we’d have to eventually declare bankruptcy. Instead, the government sells its debt by issuing treasury notes and bonds and runs the government with borrowed money.
That debt ceiling is an artificial limit on how much debt the government can sell and borrow. Since that limit is now reached, the treasury department has begun implementing what it calls “extraordinary measures” so that it can keep the government open and operating through at least June. Now what are those extraordinary measures?
The treasury secretary essentially borrows from Peter to pay Paul. The first measure is temporarily suspending investments in big programs like the retirement, disability, and health benefit funds for federal employees. It’s important to note that federal employees and retirees will not lose pay or benefits; the government just temporarily stops investing in the pot of money that funds the programs with the promise of repaying it when the crisis ends.
The other extraordinary measure is suspending reinvestment of matured government bonds into the retirement savings accounts of government workers, again with the promise of repayment. Now you may be wondering about the size of those retirement funds.
According to a report by the Office of Personnel Management, there were $986 billion dollars in net assets at the end of 2021. The next thing you may be wondering is whether the debt ceiling has been raised before, and if so when? The answer to that question is yes and more recently than you probably think.
Congress has raised the debt limit more than 80 times since the 1960s, with the most recent increase coming in 2021. Then republicans in the senate refused to raise the ceiling because they felt democrats were “acting on their own” in congress. That also led to the treasury department taking extraordinary measures. In fact, those measures have been taken 16 times since 1985.
So now it’s up to President Biden and the Republican house leadership to find common ground. We have no idea when or if that will happen. What we do know is if America defaults and is unable to pay its debt, it could be catastrophic resulting in a deep recession, millions of lost jobs and an interruption in delivery of social security checks.
House speaker Kevin McCarthy said Tuesday that he wants spending cuts. The Biden Administration has equated that to holding the u-s economy hostage. For now, all we can do is wait.