The Debt Ceiling’s Impact on Your Investments

Should the U.S. raise the debt ceiling? That’s the debate currently raging in Congress. So far, both parties have remained firmly entrenched in their positions (Republicans — yes, but with provisions for spending cuts; Democrats — yes, with no provisions). Meanwhile, news outlets are reporting officials must act soon — or dire consequences will result.

As always, it’s a good idea to explore the truth behind the headlines. First, let’s take a look at what the debt ceiling (or debt limit) is. The U.S. Department of the Treasury has this definition on their website:

The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments.¹

In other words, the U.S. doesn’t have cash sitting around to fund programs and pay debts. Instead, it borrows the money, with a cap on how much it can borrow. The current cap is $31.4 trillion, which the U.S. hit in January.² In order to borrow more money, Congress needs to agree to raise the limit, which it has done 78 times since 1960.³

The primary concern is that if a deal isn’t reached to increase the debt ceiling soon, the U.S. government will default on its debt and be unable to pay for programs such as Medicare and Social Security. That’s concerning news for people relying on those programs for their income and health care coverage.

But here’s the thing: The U.S. has never defaulted on its debt, and both Congressional parties have said they won’t let that happen now. While an agreement hasn’t been reached yet, the parties are talking and both sides understand the importance of coming to a consensus as quickly as possible.

Unfortunately, this congressional game of chicken will continue to mess with financial markets. We learned this the hard way in 2011; back then, debt ceiling debates went right up to the 11^th hour. This led to a downgrade in U.S. debt, causing higher market volatility and leading to a spike in borrowing costs.⁴

We’ve seen similar market volatility over the past two weeks as the debate rages again in Washington. And we’ll likely continue to see market turbulence until Congress comes to an agreement. The good news is that market volatility should slow once a deal is in place. Until then, we encourage you to reach out to your financial advisor if you have questions or concerns about your investments or retirement income plan.

Sources

¹ U.S. Department of the Treasury. “Debt Limit.” https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit. Accessed May 23, 2023.

² Greg Iacurci. CNBC. May 4, 2023. “What is the debt ceiling? Why it’s important and how it affects you.” https://www.cnbc.com/2023/05/04/what-is-the-debt-ceiling-why-its-important-and-how-it-affects-you.html. Accessed May 23, 2023.

³ U.S. Department of the Treasury. “Debt Limit.” https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit. Accessed May 23, 2023.

⁴ Lisa Mascaro. AP News. Jan. 24, 2023. “Debt ceiling: 2011 showdown leaves lessons for Biden, GOP.” https://apnews.com/article/biden-politics-united-states-government-national-debt-us-republican-party-d6bfc59aa623c8c972c44e1aced85d9c. Accessed May 23, 2023.