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What You Need to Know About the Debt Ceiling

Lawmakers averted a default for now, but the debt limit debate isn't going away

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After several days of high-wire negotiations in May, Congress and President Joe Biden reached a last-minute agreement on the debt ceiling. Biden's signing of the Fiscal Responsibility Act June 3 allows the U.S. government to continue paying its obligations, including Social Security and Medicare.

The measure couples spending cuts demanded by House Republicans with a suspension of the debt limit until Jan. 2, 2025 — which means the debate has been temporarily shelved but could flare up again next year. Here’s a brief explainer of what the debt ceiling is, and why it’s important.

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What is the debt ceiling?

The debt ceiling, by law, limits the amount the government can borrow for what Congress has already authorized. It doesn’t limit future spending. The U.S. officially went past the debt ceiling — $31.381 trillion — on Jan. 19. For the next several months, the Treasury Department used what it called “extraordinary measures” to pay current bills. Treasury Secretary Janet Yellen estimated that the U.S. would become unable to pay its debts June 5, an outcome the deal between Biden and House GOP leaders narrowly averted.

Defaulting on the debt is different from a government shutdown, which occurs when Congress can’t agree on a budget before the end of a fiscal year (or extensions of the fiscal year). In a default, federal agencies would stay open, but workers might have to wait to be paid, and the government wouldn’t have enough money to pay for obligations that Congress has already voted on and agreed to spend.

Why is there a debt ceiling?

Prior to the debt ceiling, Congress had to approve each time it went into debt in a separate piece of legislation. The debt ceiling bill, passed in 1917, was part of the Second Liberty Bond Act, and was meant to simplify the borrowing process. The debt ceiling was expanded to include most government spending in 1939 and was then set at $45 billion, about 10 percent more than the nation’s total debt at the time. Today, the debt ceiling affects nearly all legal obligations of the United States, including Social Security and Medicare benefits, military salaries, interest on Treasury bonds, and other payments.

How many times has the debt ceiling been raised?

Many, many times. According to the Treasury Department, Congress had voted to raise, extend or revise the amount of the debt ceiling 78 times between 1960 and this year's battle. The debt ceiling has been raised under both Democratic and Republican presidents.

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How much is the national debt?

The total national debt is about $31.5 trillion. It takes two forms: public debt and intergovernmental holdings.

The public debt is about $24.6 trillion. Public debt mainly consists of Treasury bonds, bills and notes. These public securities are sold around the world. The Federal Reserve is the largest holder of Treasuries, and U.S. investors (including the Fed) own about two-thirds of the national debt. About a third of the debt is held by foreign investors; the largest foreign owners of U.S. Treasuries are (in order) Japan, China and the United Kingdom.

The U.S. also has about $6.9 trillion in intergovernmental holdings — essentially money it owes to itself. Most of the intergovernmental holdings are in the Social Security and Medicare trust funds. These programs are largely funded by a dedicated tax stream. The surplus, if any, is invested in special government bonds. Social Security’s Old Age and Survivors Trust Fund and the Disability Insurance Trust Fund began redeeming their bonds in 2021. Medicare will start spending down money in the Hospital Insurance Fund in 2025.

Why do we have a national debt?

Because the U.S. spends more than it takes in in taxes. The difference between the government’s annual revenue and its spending is the deficit. The nation has run a deficit every year except five in the past 50 years. In fiscal year 2022, the deficit was $1.4 trillion.

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The total amount of borrowing that results is the debt. With one exception in 1836, the nation has carried debt since its founding.

What would happen if the U.S. defaulted on the debt?

We don’t know, because that has never happened.

Still, lenders like to know they are going to be repaid, and anyone who owns a Treasury security is making a loan to the Treasury. Just as your credit rating would fall if you didn’t pay your mortgage, the nation’s excellent credit could be damaged if it didn’t pay its debts in full and on time. And that, in turn, means the U.S. would pay out more in interest on its debt, just as people with a 600 credit score pay more interest than those with an 800 credit score. When the U.S. flirted with default in 2011, Standard & Poor’s stripped the country of its coveted AAA rating, thereby raising the government’s borrowing costs.

The U.S. enjoys several benefits from its excellent credit rating, not least of which is that the dollar is a global reserve currency, which means it’s frequently used in international transactions. Oil and most commodities are traded in dollars worldwide. Some countries, such as Saudi Arabia, tie the value of their currency to the dollar. And when U.S. bonds come due, the Treasury can simply roll it over into a new bond, without having to borrow from other countries using a foreign currency.

Finally, without the ability to borrow, much of the government’s payment obligations would be delayed or reduced — an event that could prove catastrophic for people who rely on government payments or services. Just how much a default would affect important programs like Social Security and Medicare is unknown.​

"There's a set of laws on the books that are mutually incompatible," explains WIlliam Gale, a senior fellow in economic studies at the Brookings Institution and the director of its Retirement Security Project.

"The Constitution says honor the public debt. Congress has passed laws requiring the government to make various outlays, including Social Security and Medicare payments," Gale says. "If the debt limit were not increasing, at least one of those would have to give, and nobody knows how it would play out."

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