What is the Debt Ceiling?
The Debt Ceiling is the amount of money the US Department of the Treasury is authorized to borrow to pay the nation’s bills. These bills include Social Security, Medicare, and interest on outstanding national debt. Congress regularly raises the US Debt Ceiling so the US can borrow more, but occasionally this process becomes political.
When is the Deadline to Raise the Debt Ceiling, or the “X-Date”?
The current Debt Ceiling is roughly $31.4 Trillion, and the US hit that borrowing limit in January 2023. However, the US Treasury can use “extraordinary measures” to continue paying its bills in the short-term, including deferring contributions to pension funds. Incoming tax receipts from the April Tax deadline will raise the level of cash on hand at the Treasury, but eventually, the Debt Ceiling will need to be raised. After reviewing Tax Receipts, the Treasury has greater clarity on when it would run out of Cash and technically default (known as the “X-Date”).” Treasury Secretary Yellen recently warned the X-Date could hit as early as June 1st.
When Happens Between Now and the X-Date?
All eyes turn to lawmakers. After Yellen’s announcement, President Biden announced a May 9th meeting with top Congressional leaders including House Speaker Kevin McCarthy. Further complicating matters, the House in only in session 12 days this month, while the Senate is in session 14 days (with only 7 of those days overlapping). A last resort option could be President Biden invoking the 14th Amendment and raising the Debt Ceiling on his own. There remains much uncertainty about the legality of such a move.
What if Congress doesn’t Raise the Debt Ceiling in Time?
The consequences of the US not raising the Debt Ceiling in time would be unprecedented, as the US has never intentionally defaulted on its debt. Investors are currently demanding a significant premium for Treasuries maturing around the X-Date, as those Treasuries could technically not be re-paid on time in the event of a default. Currently, a 1-month Treasury is yielding 5.4% – the highest level in decades.
Along with delayed interest payments for certain Treasury holders, other significant consequences of a default could include:
- Missed Paychecks for Federal employees
- Job Losses
- Delayed federal payments to Americans (i.e. Social Security)
- Selloff in the Stock Market
- Spike in Borrowing Costs for Consumers, including Mortgage Rates
- Downgrade of US Treasuries
- Drop in GDP and a Recession
When was the Last Time the US Nearly Defaulted?
The 2011 Debt Ceiling Crisis was the last time the US came close to intentionally defaulting, as Congress raised the Debt Ceiling just days before the X-Date. At that time, Congress was so gridlocked that Standard & Poor’s downgraded the AAA credit rating of US Treasuries. During this crisis, the S&P 500 fell nearly 17% in less than a month.
What Outperformed during the 2011 Debt Ceiling Crisis?
As mentioned, the S&P 500 fell roughly 17% in less than 30 days during the 2011 Debt Crisis (July 7th– August 8th). During this timeframe, Gold rose roughly 12%, as Gold can act as a hedge to market uncertainty and geopolitical concerns. Ironically, the 2011 Debt Ceiling crisis saw a flight to safety to Treasuries by investors, resulting in long-term Treasuries rallying 12.6% during this timeframe (as measured by the TLT ETF). In terms of notable underperformers, sectors more vulnerable to potential spending cuts saw major drawdowns, including Healthcare, Defense and Technology.
It’s important to note that 2011 is just one example of short-term market performance during a Debt Crisis, and past performance is no guarantee of future results.
In summary, we expect the Debt Ceiling to be raised before the X-Date, which could occur sometime in June. Nonetheless, the upcoming negotiations between lawmakers may not produce a resolution until the eleventh hour, resulting in volatility and political noise. Still, the political fallout of an intentional default remains too risky for both Republicans and Democrats, and a deal remains the most likely outcome.
Source: Bloomberg, CNBC, Wall Street Journal and Dynasty Financial Partners
Amplius Wealth Advisors is a member of Dynasty Financial Partners’ Network of Independent Registered Investment Advisor (RIA) firms. By virtue of our membership in this exclusive network, Amplius gains unparalleled access to a diverse range of insights and perspectives sourced from across the network. In line with this collaborative approach, we are pleased to share this valuable contribution from the Dynasty Investments Team. This piece does not indicate all views and opinions of Amplius Wealth Advisors.
FAQs
Under normal conditions, the Treasury sends Social Security payments one month in arrears. That means the check you receive in June covers your benefits for the month of May. If the debt ceiling isn't raised, the Social Security payments due to be sent to beneficiaries in June would most likely still go out.
What is the US debt ceiling explained? ›
When the federal government runs a deficit—that is, spends more than it collects in revenue—it borrows money to cover the difference, usually by issuing IOUs in the form of U.S. Treasury securities. The debt ceiling is a legal limit on the amount of borrowing the Treasury can do.
What happens to veteran benefits if the U.S. defaults on its debt? ›
Retirees, Veterans, and Survivors
Although there are no proposed cuts to retirement compensation, payments to retirees of the uniformed services are paid out of the Military Retirement Trust Fund. Default could result in payment disruptions for retirement and Dependency and Indemnity Compensation (DIC).
What would happen if the U.S. defaulted on its debt? ›
Economic recession or slowdown: A default could undermine investor and consumer confidence, leading to reduced spending and investment. This could also result in an economic slowdown or even a recession, affecting businesses, job creation and overall economic growth.
What does the debt ceiling mean for Social Security? ›
The debt ceiling, or limit, is the amount of money the U.S. government is allowed to borrow to meet its financial obligations, including Social Security and Medicare benefits, interest on the debt, military salaries and tax refunds, as well as a vast range of other expenses.
Will seniors get their Social Security payments if there's no debt ceiling agreement? ›
If the U.S. defaults, what happens to Social Security? It's possible your check could be delayed, although the length of the interruption would depend on how long it takes lawmakers to fix the fiscal situation. Seniors and other recipients should monitor the negotiations over the debt limit, Johnson said.
Who does the US owe the most money to? ›
- Japan. Japan held $1.15 trillion in Treasury securities as of January 2024, beating out China as the largest foreign holder of U.S. debt. ...
- China. China gets a lot of attention for holding a big chunk of the U.S. government's debt. ...
- The United Kingdom. ...
- Luxembourg. ...
- Canada.
At the top is Japan, whose national debt has remained above 100% of its GDP for two decades, reaching 255% in 2023.
How much does the US owe China? ›
China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. 1 However, it does not own the most U.S. debt of any foreign country.
How do I prepare for debt ceiling default? ›
That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses. Since a debt default would likely send interest rates soaring, any credit card debt you're saddled with may soon cost you more.
The median veteran pension is $1,756 per month. After a default, the government may have to miss or delay these payments. Active-duty soldiers are entitled to benefits such as medical, dental, vision, and prescription drug coverage, a housing allowance, a retirement savings plan, and school tuition assistance.
Can the US ever get out of debt? ›
Given current projections for large primary deficits, demographic trends, and Federal Reserve policy focusing on controlling inflation, the United States should not be expected to grow out of its debt simply through rapid growth of GDP.
What is the safest place for money if the government defaults? ›
U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt. Like CDs, Treasury securities typically pay interest at higher rates than savings accounts do, although it depends on the security's duration.
What 3 countries own the most U.S. debt? ›
As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).
Will I still get my Social Security check if the government defaults? ›
Thanks to a law passed by Congress in 1996 (Section 1145, "Protection of Social Security and Medicare Trust Funds"), Social Security checks should keep flowing, even if the U.S. government begins defaulting on its other existing financial obligations.
Are Social Security payments in danger? ›
The two trust funds are projected to be exhausted in 2034 on a combined basis, a year earlier than was estimated in 2022. Continuing fund receipts are expected to cover 77% of scheduled Social Security benefit payments when the OASI trust fund is depleted in 2033.
Can debt collectors take your Social Security money? ›
Before a debt collector can take Social Security or VA benefits, they must sue you and win a judgment against you for the amount you owe. Then, the debt collector must get a court order that tells your bank or credit union to turn over money from your account or prepaid card.
Are Social Security checks at risk? ›
Current workers will still receive Social Security benefits after the trust fund's reserves become depleted in 2034, but it's possible that future retirees will only receive 78% of their full benefits unless Congress acts.
