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As of May 26, the U.S. Treasury says it can only keep everything afloat until June 5 before the government can no longer repay its debt, which could spell disaster on a national and global scale. The clock is ticking for Congress to take action.
Here's the latest:
• Treasury Secretary Janet Yellen updated the X-date — the day when the U.S. government is expected to run out of money — to June 5. In previous remarks, Yellen had set the the X-date as early as June 1. Yellen wrote in a letter to Congress on May 26 that the government will make more than $130 billion of scheduled payments to veterans and Social Security and Medicare recipients in the first two days of June, after which the Treasury will be left "with an extremely low level of resources."
• Fitch Ratings has placed the U.S. on negative watch, warning that the U.S. could face a credit downgrade.
• President Joe Biden met with House Speaker Kevin McCarthy and the other leaders of Congress on May 16 to discuss the debt ceiling, but reportedly no consensus came to fruition. Biden said, in a press conference on Wednesday, that their staffs will continue to meet until an agreement is reached.
Biden said in a press conference on May 17 that he and the Congressional leaders were confident an agreement would be reached to avoid a default. He added, “We're going to come together because there's no alternative way to do the right thing for the country. We have to move on." He emphasized that the negotiations center on the budget moving forward and not whether or not the U.S. will pay its debts.
He said later, “America is not a deadbeat nation. We pay our bills. The nation has never defaulted on its debt and never will. And we're going to continue these discussions with congressional leaders in the coming days until we reach an agreement.”
• Following discussions on Tuesday, McCarthy confirmed what his “red line” is on debt ceiling negotiations: work requirements for programs including welfare and Medicaid.
“Remember what we’re talking about when we talk about work requirements: it’s only for those people who are able-bodied with no dependents,” said McCarthy.
Below is an updated version of the original story published on Jan. 24.
What is the debt ceiling?
So, what is the debt ceiling anyway? And why should you care?
The debt ceiling, also known as the debt limit, is the total amount of money the United States government can borrow so it can meet its legal obligations. Those obligations include funding for things like Social Security, Medicare, military salaries, interest on the national debt and tax refunds.
The United States hit its debt ceiling on Jan. 19.
When the government hits the debt ceiling, it risks eventual default, which would kick off a financial crisis. To avoid a debt ceiling crisis, Congress can raise or suspend the debt limit; the limit has been modified 20 times since 2002.
But House Republicans are looking to negotiate budget cuts before they agree to increase the debt limit.
On May 1, U.S Treasury Secretary Janet Yellen wrote to House Speaker Kevin McCarthy saying the government could potentially run out of money to meet is legal obligations by June 1 at the earliest.
"We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise shortterm borrowing costs for taxpayers, and negatively impact the credit rating of the United States," Yellen said. On May 15 she shared a similar sentiment and the same early June estimate.
Here's what you need to know about the debt ceiling and what it means for a federal government to default.
How high is the debt ceiling?
The U.S. debt ceiling was last increased to $31.4 trillion on Dec. 16, 2021.
The last time the U.S. hit the debt ceiling was in 2011, and it resulted in a standoff between Democrats and Republicans, which led to chaos in the markets. Default was narrowly avoided by a midnight deal to raise the limit, but the ripple effects on the economy lasted for months.
What is the debt ceiling X-date?
The debt ceiling "X-date" is the date when the federal government will no longer be able to pay its bills and could default.
On May 26, Yellen wrote in a letter to Congress that the new X-date is June 5.
Previously, Yellen wrote in a letter to Congress on May 1 that it is "impossible to predict with certainty the exact date" when the government would run out of money to pay its debts, but it could be as early as June 1.
Previous estimates placed the X-date somewhere in the summer; early to mid-August had been the most likely expectation.
Could Biden raise the debt ceiling under the 14th Amendment?
Biden said in a press conference on May 9 that he's exploring use of the 14th Amendment to work around the debt ceiling, though he indicated “taking a look” at the legality of using the 14th Amendment would be “months down the road.”
The 14th Amendment, passed following the Civil War, mostly provided citizenship and equal protection under the law to all people born or naturalized in the U.S., including those formerly enslaved. But the fourth section of the amendment refers to debt payment. It says, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Invoking the 14th Amendment to raise the debt ceiling unilaterally could result in potential legal concerns and objections. Previously, President Barack Obama explored use of the 14th Amendment to raise the debt ceiling, but ultimately backed away from it.
Could a debt limit breach impact Social Security payments?
If the federal government runs out of money on June 1, then Social Security recipients are in danger of missing their checks. Supplemental Security Income checks go out on the first of each month; Social Security checks are sent throughout the month, depending on the recipient's birthday.
The majority of those who receive Social Security are seniors, retirees and people with disabilities. Social Security provides 90% of household income for a more than a quarter of those 65 and older, according to the Social Security Administration.
There's still varying speculation as to when exactly the U.S. will run out of money, but most put an X-date in early June. A default would be unprecedented and is still unlikely.
On May 25, Biden said during a Rose Garden speech, "I’ve made clear time and again: Defaulting on our national debt is not an option. The American people deserve to know that their Social Security payments will be there, that veterans’ hospitals remain open, and that economic progress will be made and we’re going to continue to make it. Default puts all that at risk. Congressional leaders understand that, and they’ve all agreed: There will be no default."
Debt ceiling news
Extraordinary measures are in place
In order to prevent the United States from defaulting, the Department of the Treasury is implementing “extraordinary measures” that, for now, primarily impact retirement funds. These measures include:
Redeeming existing and suspending any new investments of retirement funds for government employees, including the Civil Service Retirement and Disability Fund, or CSRDF, and the Postal Service Retiree Health Benefits Fund, or Postal Fund.
Suspending reinvestment in the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan, or G Fund.
On May 1, the Treasury also suspended issuance of State and Local Government Series (SLGS) Treasury securities, which, when issued, count against the debt limit. These securities are issued to states and municipalities to help them comply with certain tax rules.
Republicans want cutbacks before raising debt ceiling
Congress usually agrees that raising the debt limit, and thereby repaying the government's debts, is necessary, and routinely votes for it, as they last did in 2021. However, this time it won't be so easy.
Republicans have been demanding cuts to future spending in exchange for increasing the debt ceiling. Again, negotiating in order to raise the debt ceiling is unusual.
On April 19 House Republicans unveiled the “Limit, Save, Grow, Act,” which would raise the debt limit by $1.5 trillion or through the end of March 2024., whichever comes first. McCarthy says the plan includes $4.5 trillion in savings through cutbacks.
“The Limit, Save, Grow Act will limit federal spending, save taxpayers trillions of dollars, grow our economy, and lift the debt limit into next year,” said McCarthy in a prepared statement. “This legislation will make us less dependent on the whims of the Chinese Communist Party and curb high inflation, all without touching Social Security or Medicare — because no one is hurt more by inflation than seniors.”
The bill passed the Republican-led House on April 26. The final vote was 217-215 with only four Republicans dissenting. It now heads to the Democratic-led Senate where it is largely expected to fail.
In addition to raising the debt ceiling, the 320-page bill would:
Target cuts to the budget that would bring it back to 2022 fiscal year levels.
Reclaim some of the $80 billion in funds allocated to improve the Internal Revenue Service, which was approved last year.
Add new requirements for welfare and Medicaid recipients including longer work hours.
Halt Biden’s federal student loan forgiveness plan, the future of which is currently in the hands of the Supreme Court.
Claw back unused COVID-19 pandemic funding.
Biden responded to the bill in prepared remarks on the same day: “Folks, it’s the same old trickle-down dressed up in MAGA clothing. Only worse.” Biden said the cuts target programs that “millions of working-and middle-class Americans count on” while “separately pushing more tax giveaways” that benefit corporations and the wealthy.
Meanwhile, on April 19, the “Problem Solvers Group,” a bipartisan caucus comprised of members of Congress, released a one-page outline of its plan to address the debt ceiling, which included four steps. The first step would temporarily suspend the debt ceiling through the end of the year. If the other steps are achieved, it would then increase the debt ceiling through Feb. 28, 2025.
The second step would create an external fiscal commission, which would have until the end of 2024 to recommend a plan to stabilize long-term deficits and debt. The plan would then be voted on by Feb. 28, 2025. The third step would adopt controls to stabilize the long-term budget during the FY 2024 budget and appropriations cycle. The final step would adopt budget reforms.
Worries are growing over a default
On Tuesday March 7, Sen. Elizabeth Warren, D-Mass., chair of the Subcommitee on Economic Policy, held a hearing on the debt limit, in which experts assessed its economic and financial consequences. In prepared testimony at the hearing, Mark Zandi, chief economist of the financial services company Moody's Analytics, said a default would be "a catastrophic blow to the already fragile economy."
Zandi warned of consequences akin to the Great Recession, including a roiled stock market that would cause market crashes, high interest rates and tanking equity prices. He said even if the default is quickly remedied, it would be too late to avoid a recession. Waiting too long to act could cause severe economic turmoil with global impacts.
The testimony included Moody's simulations of what an economic downturn could be, should the government default, casting a bleak view of the prospect that includes:
• Real GDP declines over 4% and diminished long-term growth prospects.
• 7 million jobs lost.
• Over 8% unemployment.
• Stock price decreases by almost a fifth, with households seeing a $10 trillion decline in wealth as a result.
• Spiking rates on treasury yields, mortgages and other consumer and corporate borrowing.
Further, Zandi expressed skepticism that lawmakers would be able to resolve their impasse quickly, as evidenced in part by the difficulty House Republicans had in electing McCarthy as speaker of the House. It took 15 rounds of voting for McCarthy to succeed.
"Odds that lawmakers are unable to get it together and avoid a breach of the debt limit appear to be meaningfully greater than zero," Zandi said in the testimony.
What’s the difference between the debt ceiling and the national debt?
The debt ceiling and the national debt aren’t the same, but they relate to one another. The debt ceiling is the total the government is allowed to borrow before it defaults. The national debt — $31.41 trillion as of Jan. 19 — is the total amount of outstanding money that is currently borrowed by the federal government, plus interest. Refusing to vote to lift the debt ceiling would not bring down the national debt — it would mean the government cannot repay the debt it already has.
Here’s how the national debt works: When spending surpasses revenue in a fiscal year, the government runs a budget deficit. In order to pay the deficit, the federal government borrows money by selling what are known as marketable securities, such as Treasury bonds, bills, notes, floating rate notes and Treasury inflation-protected securities, or TIPS. The total debt includes both the amount borrowed plus the interest that it promises to those who lent money by purchasing those marketable securities.
Holden Lewis and Kate Wood contributed to this story.