“They could ignore the debt limit,” he said. “It is a question that has never been adjudicated because it hasn’t come up before.”
But previous administrations have rejected that approach, he said, and legal experts don’t agree about whether it would actually work.
Understand the U.S. Debt Ceiling
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What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury bills and savings bonds to fulfill its financial obligations. Because the U.S. runs budget deficits, it must borrow huge sums of money to pay its bills.
Why does the U.S. limit its borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so the Treasury did not need to ask for permission each time it needed to issue bonds to pay bills.
What about raising the debt limit via reconciliation? Reconciliation, a fast-track process that shields fiscal legislation from a filibuster, is one way Democrats could steer around Republican opposition and act unilaterally. But Democratic leaders have publicly resisted that option, which would be complex and time-consuming.
Why is raising the debt limit so difficult? For many years, raising the debt ceiling was routine. But as the political environment has become more polarized, Congress has been playing an increasingly dangerous political game over the debt ceiling.
Do other countries do it this way? Denmark also has a debt limit, but it is set so high that raising it is generally not an issue. Most other countries do not. In Poland, public debt cannot exceed 60 percent of gross domestic product.
What are the alternatives to the debt ceiling? The lack of a replacement is one of the main reasons the debt ceiling has persisted. Ms. Yellen said that she would support legislation to abolish the debt limit, which she described as “destructive.” It would take an act of Congress to do away with the debt limit.
What about Social Security?
Social Security — which reaches tens of millions of Americans through retirement, disability and survivor benefits — is a bit different from other programs because it is largely financed through a dedicated payroll tax. It also has its own trust funds, which may give it more flexibility, some experts said.
The taxes coming into the program aren’t enough to pay all of the benefits, according to Jason J. Fichtner, chief economist at the Bipartisan Policy Center, who held several positions, including acting principal deputy commissioner, at the Social Security Administration. But since the checks are sent out on a staggered basis, the agency could wait for more cash to come in, which would result in delayed payments.
But there’s also at least one other possibility. If the Treasury redeemed the special-issue bonds from the program’s trust fund to pay benefits — and then quickly replaced them with newly issued bonds — that wouldn’t raise the debt ceiling, Mr. Fichtner argues.
It’s not clear whether the Treasury agrees with his assessment.
What else could happen?
If the United States were to default on its debts — that is, stop making payments on the Treasurys it has sold — there would almost certainly be major consequences in the global markets.
The immediate effect would be that portfolios held by investors as varied as pension funds and holders of 401(k)s would face a market tailspin. Even after any debt-ceiling standoff were resolved, global investors would demand higher interest payments on U.S. Treasury bonds — so the government’s borrowing in the future could become more expensive.
Article source: https://www.nytimes.com/2021/10/06/business/debt-ceiling-social-security-medicare.html
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