We've hit the ceiling. Again. And, unfortunately, I'm not talking about excited jumping up and down, or escaped balloons. I'm talking about the federal government's legal limit on how much money it can have in debt. On Thursday, the federal government's previous suspension of the debt ceiling expired, so we're back at the limit of our borrowing permission.
Debt ceiling crises are not unusual. I've written about the topic at least nine times since 2011. And, so far, the debt ceilings always get resolved without directly impacting military families. Which leads a lot of people to say, "Why are you being alarmist," or "Stop worrying people unnecessarily," or even, "You're lying. This can't touch military families."
I am a big proponent of understanding what's going on around you. Even though it hasn't yet impacted military families, the debt ceiling is an important issue that we should ALL understand. To not be worried about the debt ceiling is somewhat like not being worried about the housing bubble or a stock market crash. I'm not telling people to be worried, I'm telling people to be aware.
What Is The Debt Ceiling?
Each month, the federal government spends more money than it earns in revenue (primarily taxes.) It borrows money to pay all its bills. There is a legal limit on the total amount of money the country can owe, called the "debt ceiling." It's basically a credit limit, but imposed by the borrower (the US), not the lenders. Because the country continues to outspend its income each month, it runs into the debt ceiling on a regular basis. Every time we hit our credit limit, Congress has to vote to increase the debt ceiling (it has happened 74 times since 1962.) In more recent years, however, the country has become more aware of the problems that come with our debt, and quick-fix increases are less popular.
What Happens When We Hit The Debt Ceiling
There are two parts to hitting the debt ceiling. Part one is when the government starts taking "extraordinary measures," and part two when those extraordinary measures are no longer enough and the country is just out of money. To compare this to a family budget, part one is when you move some money from your savings account to your checking account to pay your bills. Part two is when there's no money left in your savings account.
Right now, we're in part one. You can read about these extraordinary measures here. They don't seem like much to the average person, but they do have an impact on the nation as a whole. And it could directly impact some military members, as the Thrift Savings Plan (TSP) board issued the following announcement Thursday:
G Fund and the debt limit — (March 16, 2017) As of today, March 16, 2017, the U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 25 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected.
Once we reach the debt ceiling (part two), then we're in real trouble. There are no laws or precedent for what will happen then. The government's income is only enough to pay about 69% of its bills each day. Just like a family who doesn't have enough money to pay all its bills, the federal government could end up paying some bills first, and other bills later.
There are several theories about how the Treasury could make its payments. There are a number of issues that come into the decision: legal authority, physical capability (in terms of computer systems, etc.), long-term implications and sensibility.
Many people suggest that Congress, the President, or the Treasury Secretary can prioritize certain obligations. First, there is not legal authority to prioritize payments. Second, even if Congress, the President, or the Treasury Secretary could legally prioritize certain payments, it is unlikely that the computer can be reprogrammed to effectively sort the approximately 100 million payments made each month. For these reasons, previous Secretary of the Treasury Jack Lew repeatedly stated that the Treasury would not be able to prioritize payments in the event of a debt ceiling crisis.
The next most likely solution is to make payments as the money comes in. It is thought that the Treasury would have to wait until it has enough money to pay an entire day's worth of bills, and then do so. For example, the Treasury might not have enough money to pay Monday’s bills on Monday, but it might have enough money by Tuesday. This would result in a payment delay which would grow if the situation were not resolves.
There are other ideas, but they all run into the same challenges: legal authority, physical capability (in terms of computer systems, etc.), long-term implications and sensibility.
The reality is, no one is exactly sure how things would unfold if the debt ceiling isn't raised.
How Could This Impact You?
Military families, retirees, Survivor Benefit Plan (SBP) annuitants, disabled veterans, Dependency and Indemnity Compensation (DIC) recipients, and GI Bill users should pay attention to the current debt ceiling situation. All federal payments may be impacted if the ceiling is not raised before we run out of current borrowing authority.
Here are the various pays and benefits that would be immediately impacted if Congress does not act to increase the debt ceiling:
- Military Pay
- Retired Military Pay
- Survivor Benefit Plan (SBP) Annuity Payments
- Veteran Affairs (VA) Disability Compensation
- Dependency and Indemnity Compensation (DIC)
- GI Bill payments
- Low-Income Veterans and Survivors Benefits
Every time I write about this, many people tell me that "military pay can't be held up." This is not true. During the 2011 debt ceiling situation, the Department of Treasury wrote an information sheet called: Debt Limit: Myth vs. Fact. Military salaries are mentioned in the very first paragraph, and then twice more throughout the document. Military pay would be impacted by the federal government's inability to borrow more money.
Should You Be Worried?
Yes and no.
Realistically, no one actually thinks that Congress will fail to pass another increase to our government's ability to borrow. However, that's just another "kick the can down the road" solution to a very real problem facing our country. The federal government is currently spending $100 for every $69 of income, and it has been overspending for decades. A solution must be found, but it's not going to be pretty or fast. But short-term, federal payments will probably not be affected.
On the other hand, this is yet another example of why military families, and anyone receiving federal benefits, needs to be concerned about the economic stability of our country. I am concerned: most of our retirement income plan is based around some level of federal benefits. We all need to have savings, diversity our income, and have backup plans in case things go crazy. Like so many things, we need to prepare for the worst, hope for the best. Saying, "It won't happen" is not a good solution to any situation.
