month in order to prevent the government from defaulting.
First, the government will temporarily suspend payments to the retirement, disability and health benefit funds for federal employees. Second, it will suspend the reinvestment of maturing government bonds in the retirement savings accounts of government workers.
By suspending the payments, the government can reduce the amount of outstanding debt. That enables the Treasury Department to keep financing government operations, according to Yellen’s letter.
Q: What allows Treasury to use these measures?
A: No dispute there. Congress has given Treasury the authority to do so.
Because these are retirement accounts, no one is harmed by the government equivalent of an IOU. The funds are made whole after a debt ceiling increase or suspension becomes law. It’s not necessarily the measures that can harm the economy but rather the doubts among consumers and businesses about whether lawmakers will increase the borrowing cap.
Q: How big are these retirement funds?
A: There were $986 billion in net assets of the civil service and federal employees retirement funds at he end of fiscal 2021, according to a report by the Office of Personnel Management. The required government contributions to the funds are large enough to rely on these extraordinary measures for roughly five months.
Q: How common is this?
A: “Treasury Secretaries in every Administration over recent decades have used these extraordinary measures when necessary,” Yellen wrote in her letter.
The measures were first deployed in 1985 and have been used at least 16 times since then, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.
Q: Why do we have a debt limit?
A: Before World War I, Congress needed to approve each bond issuance. The debt limit was created as a workaround to finance the war effort without needing a constant series of votes.
Since then, a tool created to make it easier for the government to function has become a source of dysfunction, stoking partisan warfare and creating economic risk as the debt has increased in size over the past 20 years.
Q: How risky is the brinkmanship this time?
A: It looks alarming — and it’s not clear how Biden, McCarthy and the Democratic Senate will find common ground. A default could cause millions of job losses, a deep recession that would reverberate globally and, ironically, higher interest rates that would make it harder to manage the federal debt.
McCarthy said Tuesday that talks should begin immediately on the potential spending cuts that Republicans are seeking in exchange for raising the debt limit, even though the Biden administration has equated that demand to holding the U.S. economy hostage.
The Biden administration wants the borrowing cap increased without any preconditions. White House press secretary Karine Jean-Pierre on Tuesday ruled out holding talks with McCarthy.
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