Prepping for a Debt Ceiling Showdown

You’ve probably heard the words “debt ceiling” coming up a lot more lately. And that’s because the United States is about two weeks away from hitting that borrowing limit and defaulting on its obligations. If an agreement isn’t reached, it could mean that military pay and federal salaries are temporarily suspended (among other payments made by the federal government). That, of course, is the worst-case scenario. But, to arm you with information, here’s what you need to know about this year’s debt ceiling deadline. 

What is the debt ceiling?

Briefly, the debt ceiling is the cap set by Congress to limit the amount the government can borrow. It was first established in 1917 (and at that time was set to $11.5 billion) to help fund the war effort. Before WWI, every time the government issued debt, it needed congressional approval to do so. U.S. debt has risen under every president for the past three decade, and when the U.S. nears the debt ceiling, the Treasury alerts Congress, which then must act to increase the limit. If it doesn’t, the Treasury is left with two primary options: raise taxes by billions of dollars to cover necessary payments or default. Both options have major consequences. Congress has voted to increase the debt ceiling every time it has been required (eventually—see “Has this ever happened before?” below).

Why should I care about this now?

In February 2014, Congress suspended the debt limit at $16.7 trillion through March 15, 2015. The following day, the debt limit rose to $18.1 trillion to take into account any new borrowing. This move, however, required the Treasury to take extraordinary measures to keep the U.S. from default, including a temporary suspension of daily reinvestments into the TSP government securities fund and investments into the Civil Service Retirement Fund (the investments in those funds will be made, with interest, once a debt ceiling agreement is reached).

Last week, the Treasury informed Congress that on November 3, it would have no other options for staving off default (although think tanks have argued that this deadline is actually closer to two to three weeks later).

How does the debt ceiling typically impact federal workers or retirees?

About as much as any other citizen. As long as Congress raises the debt ceiling as needed, everyone continues being paid and investments are made into retirement funds.

What happens if Congress does not reach an agreement on the debt ceiling by the deadline (early November)? How close are they to a deal?

If the Treasury is no longer able to meet all of its standing obligations, it could potentially mean that federal employees and members of the military lose their paychecks. It might also mean the suspension of some pension payments.

There are lots of ideas floating around in Congress, some of which would ask the Treasury to prioritize payments (for example, Social Security payments are made but federal wages are not paid), but the Treasury has stated that this is not a feasible option. Other proposals, like one released October 20 by a group of conservative House Republicans would raise the debt ceiling while subsequently requiring mandatory cuts to programs like Medicare, Social Security, and SNAP. Republican leadership in Congress has stated that the party will not allow a default, and there is some expectation that Speaker Boehner will work out a “clean” agreement before his intended resignation on October 30. Both parties in Congress are currently working with the White House to come to some form of agreement, which might be tied to the federal budget . (Remember when Congress averted the last shutdown in September? Another could be looming if there is no long-term or short-term budget agreement by December 11.). 

Has this ever happened before?

The U.S. has only defaulted once, in 1979, when a computer glitch at the Treasury caused some notes to not be paid in full. This, however, is not considered a true default because the Treasury notes were paid in full once the mistake was noticed. That said, the U.S. has come close to default in recent history.

In 2011, Congress and the White House reached an agreement on raising the debt ceiling within a couple days of the deadline. In a mainly symbolic move at that time, Standard & Poor’s responded by downgrading U.S. credit rating to AA+, one step below the highest possible rating. And in 2013, the debt ceiling issue came up at the same time as the inability of Congress to negotiate a budget agreement partially shutdown the government. The final agreement to end the shutdown also increased the debt ceiling from October 2013 to February 2014.

If things go poorly, how can I prepare myself to withstand lost paychecks?

We don’t know now what kind of agreement might be reached on the debt ceiling (or not), so it’s hard to say whether a possible loss of federal and military pay would be temporary, and back pay given once an agreement is reached, or if the loss would be permanent. Either way, it’s good to arm yourself with some ideas on how to weather a temporary decrease in your earnings. Obviously, the most notable way is to increase your savings, but because the deadline is only a couple of weeks away, here are a few other shorter-term tips to consider:

• Hold off on large purchases: If you were planning to make a large purchase in the next couple of weeks, hold off if at all possible (unless, of course, you are already contractually obligated to the purchase).
• Temporarily reduce your expenses: If at all possible, cut back on some of your more variable expenses, such as groceries, entertainment, or dining out. This will put a little extra in your wallet should the worst happen.
• Develop a short-term budget: Look at what you currently make and spend per week or month, and then develop worst case scenario budgets, should you not receive your regular paycheck over the course of two weeks or a month. Know whether you have enough in savings to cover your necessary expenses, and budget out how much extra you’ll have.