What Happens Now That the U.S. Has Hit the Debt Limit

Some Treasury accounting tricks will buy Congress a few more months to negotiate

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The U.S. will hit the federal debt ceiling today, forcing the Treasury to borrow from federal workers' retirement funds, the Washington Post's Zachary A. Goldfarb reports. The Treasury is bound by law to pay back the money, so retirees won't be affected in the short term. But in the long term, however, budget-cutters are looking to compel federal workers to pay a lot more of their own retirement--under the Republican plan, about 2 million federal workers would be slapped with an immediate 5 percent pay cut. The change would save $120 billion over 10 years.

Though hitting the debt limit has been portrayed as a horrific apocalyptic event horizon, the Treasury Department actually has a few accounting tricks to keep the country going while Congress negotiates. Treasury Secretary Timothy Geithner's accounting tricks only buy Congress a few extra months to negotiate a new debt ceiling. He's also suspended a financial management program for state and local governments. As Bruce Barlett has explained, Geithner can make do with payroll taxes and income tax withholding for a little while. Eventually, though, "somebody at the Treasury is going to have to decide ... who gets paid this month and who doesn't," Bartlett writes. But "not everybody can be put be off. By law, Social Security benefits have to go out on the first of the month. But the Treasury literally would not have the cash in its account to cover those benefits, or to pay interest on the debt--at which point you have a default."

Most lawmakers acknowledge the debt limit has to be raised, but no one wants to do it, as Donald Marron, a former economic adviser to President George W. Bush, told The New York Times' John Harwood. The limit has been raised 78 times since 1960, a Washington ritual that has not become less fraught despite its frequency since a debt ceiling was mandated in 1917.

Tweaking federal pension funding is one suggestion to come out of talks between Vice President Joe Biden and congressional leaders. "Federal workers pay only $1 of payroll for every $15 in their plans," Slate's Dave Weigel notes. "This is being traded away as part of a debt deal, starting today." The negotiators have so far avoided the bigger ideological fights, like tax hikes and overhauling Medicare and Medicaid.

This article is from the archive of our partner The Wire.