"Federal retirees and employees will be unaffected" by the latest debt maneuvers, Treasury Secretary Timothy Geithner wrote in a letter to lawmakers. Above, Geithner speaks during a May 13 news conference in Washington. (Saul Loeb / Agence France-Presse)
For the past few days, the government has been brushing up against its $14.3 trillion debt limit. To buy time and free up more borrowing authority, Treasury Secretary Timothy Geithner has resorted to time-tested maneuvers involving two of the biggest federal retirement funds: the Civil Service Retirement and Disability Fund (CSRDF), which provides benefits to retired and disabled federal employees in the Civil Service Retirement System, and the Thrift Savings Plan's Government Securities Investment Fund, better known as the G Fund.
Both are invested in government bonds, which count as borrowing against the national debt ceiling. Under the Treasury Department's strategy, the government trims the two funds' holdings in those bonds. For the 2½-month period from mid-May until Aug. 2, that's supposed to free up about $214 billion in "headroom" against the debt ceiling, thus allowing the government to borrow a similar amount of money from other sources to keep paying its bills.
"Federal retirees and employees will be unaffected by these actions," Geithner wrote in a letter to lawmakers earlier this week. By law, those accounts must eventually be made whole. The department took similar "extraordinary measures" in 2002, 2003, 2004 and 2006; each time, the G Fund and the CSRDF were made whole with back interest once the ceiling was raised.
Even so, "this bothers me a bit," Charles Ray, a career State Department Foreign Service officer nearing retirement, said in an email.
"When the feds start playing with the accounts, things always seem to get snarled up," said Ray, who stressed that he was speaking personally as a federal employee nearing retirement. "I haven't looked into the details of what they plan to do yet, but I suspect I won't be left feeling a lot more confident after doing so."
Ray is not alone, according to advocates for federal workers. Despite the precedents, "people are more concerned," said Julie Tagen, assistant legislative director for the National Active and Retired Federal Employees Association.
Even if a deal on raising the national debt ceiling is reached by the Aug. 2 deadline, the government may have to take similar steps again soon, experts said. That's because negotiators may opt to strike multiple, short-term budget-cutting deals to raise the debt ceiling instead of one long-term accord.
"I don't know if there's going to be a big budget deal," said Stan Collender, a former congressional budget staffer who now works at Qorvis Communications, a public relations firm. "I can see a series of short-term increases" in the ceiling.
Norman Ornstein, a political scientist and veteran Congress-watcher, agreed. "It remains extremely unlikely that the deal we get out of this is a long-term one," said Ornstein, a resident scholar at the American Enterprise Institute think tank.
Even though the government hit the debt ceiling this week, the Obama administration and Congress are nowhere close to an agreement that would tie an increase in the ceiling to major spending reductions.
This year's negotiations are especially volatile, as congressional Republicans are demanding exactly that tradeoff. In a May 9 speech, House Speaker John Boehner, R-Ohio, said that any hike in the ceiling should be more than matched by spending reductions.
Amid record budget deficits, Boehner said, "we should be talking about cuts of trillions, not just billions," Closed-door talks led by Vice President Joe Biden have so far produced no agreement. On a separate front, hopes of a grand bargain took another blow this week, when a leading conservative, Sen. Tom Coburn, R-Okla, bolted the so-called "Gang of Six," a bipartisan group of senators trying to forge a legislative package to cut future deficits by $4 trillion over 10 years.
Meanwhile, delays in raising the debt ceiling create management challenges for the Treasury Department and uncertainty in the market for government bonds. And all bets are off if Congress doesn't agree to increase the ceiling by Aug. 2, when the Treasury Department runs out of options, Geithner indicated in another recent letter to lawmakers.
Borrowing accounts for almost 40 percent of this year's $3.6 trillion federal budget. A default would trigger another financial crisis, Geithner warned.
Not only would interest rates climb, he said, but a broad range of government payments, including Social Security checks, military salaries and tax refunds, would have to be stopped, limited or delayed.
After Social Security payments, the government would be forced to choose whom to pay first, Collender said. How that would work is impossible to predict exactly, he said, but bondholders would probably be at the head of the line, followed by federal workers and then contractors.