As you may have heard, the United States hit its debt limit on Jan. 19, 2023. If you’re wondering what the debt ceiling is or how the situation could affect you, we compiled this Q&A to answer questions you may have.
What is the debt ceiling?
Simply put, the debt ceiling – or debt limit – is the total amount of money that the government is authorized to borrow via U.S. Treasury securities, such as bills and bonds, to meet its existing obligations. These payments include Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments. The key word is existing: The debt ceiling does not apply to new spending. The U.S. hit its technical debt limit of $34.1 trillion on Jan. 19, 2023, according to Treasury Secretary Janet Yellen.
What will happen next?
Secretary Yellen announced that the Treasury will take “extraordinary measures” to allow the U.S. to pay its bills in the short term. These measures are fiscal accounting methods to reduce certain government investments so that the U.S. can meet its obligations. While the timelines are still unclear, those options could allow the government to continue paying its bills until June. Once the extraordinary measures are exhausted, the Treasury is faced with the prospect of not paying bills Congress already authorized – unless legislators act first to raise the debt ceiling.
How many times has the debt ceiling been raised?
Because the government spends more than it takes in, it must get approval from Congress to increase its spending limit. Since 1960, the U.S. debt ceiling has been raised 78 times and 20 times since 2001, according to the Brookings Institute. The last time Congress had a significant debt limit crisis and was at risk of default was in 2011. Although a default was avoided, it was enough for debt-rating agency Standard & Poor’s to downgrade U.S. debt for the first time and stock markets were roiled.
What will it mean if an agreement isn’t reached?
The worst-case scenario would be if the U.S. defaulted on its debt, which would have significant consequences for markets and economies across the globe. The U.S. government has never intentionally defaulted on a debt (there was an example in 1979 of a short-lived, unintentional default on some Treasury securities) but a protracted battle and lack of agreement could potentially push the issue to the wire. The possibility for uncertainty alone could be enough to keep markets volatile over the next several months.
A default could also mean another U.S. credit downgrade, higher borrowing costs, and an interruption in Medicare and Social Security benefits – although as mandated costs, they should, in theory, be immune from default. Still, it could be an uncomfortable wait to find out as Congress debates a solution.
What should I do to prepare?
Keep doing what you’re doing – build and maintain your cash reserves (we generally recommend having three to 24 months’ of spending set aside, depending on your situation), continue your workplace retirement contributions, consider major purchases carefully and steel yourself for some market volatility. This story is still unfolding and there are a number of solutions that could develop in the months to come – in the meantime it’s watch, wait and remember to control the things you can control.