Treasury Uses Retirement Funds to Prevent Going Over US Debt Ceiling

Bloomberg - To avoid exceeding the US debt ceiling, the Treasury uses retirement funds.
To avoid exceeding the US debt ceiling, the Treasury uses retirement funds

By Bloomberg, The federal debt ceiling was reached on Thursday, and the Treasury Department is now starting to deploy exceptional measures to prevent a US payment default.

In order to provide the Treasury flexibility to continue paying federal payments while it is unable to increase the overall level of debt, the department is making adjustments to investments in two government-run retirement plans.

The move was communicated to congressional leaders of both parties by Treasury Secretary Janet Yellen in a letter on Thursday. When she warned that the debt ceiling will be reached on January 19, she had previously informed them of the strategy.

Yellen encouraged Congress to swiftly raise the debt ceiling and reaffirmed that the length of time that the exceptional measures will prevent the country from running out of money is "subject to substantial uncertainty." She predicted last week that the steps probably wouldn't be completed by early June.

The Treasury's action specifically affects the following funds:

  • The Civil Service Retirement and Disability Fund, or CSRDF, offers defined benefits to federal employees who have retired or become disabled.
  • Payments for retiree health benefits premiums are made by the Postal Service Retiree Health Benefits Fund, or PSRHBF. Additionally, the fund holds special-issue Treasury securities.

The two funds make investments in Treasury special-issue securities, which are subject to the debt ceiling. The three will be "made whole," with participants unaffected after the debt ceiling is raised.

What is the debt ceiling, and will the United States raise it?

The Treasury has employed similar tactics more than a dozen times since 1985, so this is by no means the first instance.

Yellen stated that the Treasury will be under a "debt-issuance pause period" for the CSRDF beginning on Thursday and extending until June 5. She added that the Treasury would halt new investments credited to the fund and redeem some of the ones it currently has.

Regarding the PSRHBF, Yellen stated that the Treasury will halt further investments of funds attributed to that fund.

The Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan, a defined-contribution retirement fund for federal employees, is a third fund whose resources the Treasury also expected using this month, according to Yellen's statement from last week.

A defined-contribution retirement plan for federal employees, the so-called G Fund also makes investments in special-issue Treasury securities that are subject to the debt ceiling. Yellen didn't mention the G Fund in her letter on Thursday.

The amount of leeway under the debt ceiling that would be created by the extraordinary measures described in Yellen's letter was not stated.

Gennadiy Goldberg, a senior US rates strategist at TD Securities, estimated that the Treasury currently has between $350 billion and $400 billion in headroom available overall. According to him, the Treasury should be able to last until some point between July and August without running out of money thanks to that and the additional revenue that will come from individual income taxes that are due in April.

The Treasury has also previously stopped reinvesting securities owned by the Exchange Stabilization Fund on a daily basis in order to conserve headroom under the debt ceiling. It's a unique car from the 1930s, and the Treasury secretary has a lot of control over it.

State and local government series Treasuries were previously suspended by the Treasury. State and municipal governments can store funds in those securities, which count toward the federal debt ceiling. When the issuing of SLGS is halted, those governments must make investments in other assets.

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