This article has been updated to include both the TSP’s and Secretary Yellen’s recent statements about the debt limit and its impact on the G Fund.
Secretary of the Treasury, Janet Yellen, is asking Congress to raise the debt ceiling as soon as possible. She writes that the government could become unable to pay its bills after early June.
“While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the government’s obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June,” she wrote to Congressional leaders.
Yellen added:
The two extraordinary measures Treasury anticipates implementing this month are (1) redeeming existing, and suspending new, investments off the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (Postal Fund), and (2) suspending reinvestment off the Government Securities Investment Fund (G Fund) of the Federal Employees Retirement System Thrift Savings Plan. Congress has expressly provided Treasury with authority to take these actions, and prior Treasury Secretaries have used these measures, which will reduce the amount of outstanding debt subject to the limit and temporarily provide additional capacity for Treasury to continue financing the operations of the federal government. After the debt limit impasse has ended, the CSRDF, Postal Fund, and G Fund will be made whole.
Yellen also wrote in a letter sent to House Speaker Kevin McCarthy (R-CA) on January 24, 2023 that the Treasury Department has now suspended full investments into the G Fund:
As of January 23, I have also determined that, by reason of the statutory debt limit, I will be unable to fully invest the Government Securities Investment Fund (G Fund) of the Thrift Savings Fund, part of the Federal Employees’ Retirement System, in interest bearing securities of the United States. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit. My predecessors have taken this suspension action in similar circumstances. By law, the G Fund will be made whole once the debt limit is increased or suspended. Federal retirees and employees will be unaffected by this action.
The current debt ceiling is going up fast. It is now about $31 trillion.
“Extraordinary Measures” Will Be Taken by Treasury
The Treasury Department began taking the aforementioned “extraordinary measures” on Thursday, January 19, 2023. This will enable the federal government to continue borrowing money while Congress debates raising the debt ceiling.
As noted by the Wall Street Journal:
With the federal government constrained by the roughly $31.4 trillion debt limit, the Treasury Department began deploying so-called extraordinary measures. Those accounting maneuvers, which include suspending investments for certain government accounts, will allow the Treasury to keep paying obligations to bondholders, Social Security recipients and others until at least early June, the department said last week.
This has happened in the past on numerous occasions. It means that the federal government will begin taking “extraordinary measures” to avoid hitting the debt ceiling by stopping investment into two retirement funds for federal employees.
We do not know when the debt ceiling limit will be raised. There is little doubt, however, that it will be raised as the federal government continues to spend more money than it receives in revenue. While the free-wheeling spending has been ongoing for some time, it is always harder to cut back on the spending than it is to raise the debt ceiling—at least up to a point.
We can anticipate a spirited fight in Congress on the issue. In the newly elected House of Representatives, Republicans who eventually supported Kevin McCarthy in his quest to become Speaker of the House have said the deal they negotiated with McCarthy requires specific spending constraints as part of any deal to lift the debt ceiling. Any specifics of the agreement have not been made public.
Congressman McCarthy recently said on this issue: “We’ve got to change the way we are spending money wastefully in this country and we’re going to make sure that happens.”
Democrats, on the other hand, have opposed linking spending cuts with the debt ceiling.
In the meantime, many federal employees will be contributing to financing the operation of the federal government whether they know about it or not. This is because G Fund assets in the Thrift Savings Plan (TSP) will again be used by the federal government to help meet expenses.
Never Let a Good Crisis Go to Waste: Scare Tactics and the Debt Ceiling
Successful politicians are very good at using current events to achieve their political goals. Exaggeration and hyperbole are part of the game. Someone who can achieve an elected national office must be a talented politician to reach that goal. Among other things, using current events and scare tactics are an effective combination to convince voters that one side has taken a despicable position that will lead to a downfall in government prestige while the other side is embracing a halo that ensures future prosperity and success.
The phrase “Never let a good crisis go to waste” is attributed to Winston Churchill. Giving him credit may or may not be accurate, but he was a brilliant leader and tactician, so he may deserve the credit. Whoever says it means that in a crisis, there is an opportunity to make changes that would not be possible under normal circumstances.
More recently, Rahm Emanual, the White House Chief of Staff under President Obama used the phrase. Emanuel used this phrase during the 2008 financial crisis to describe the opportunity for the Obama administration to push through major policy changes. He also used it in 2020 while discussing the coronavirus problem.
Sometimes scare tactics work. One side in a political argument will back off their position—mainly if the public (i.e. voters) believe the hyperbole and public opinion strongly favors one side over the other.
While the phrase is cynical, it is noteworthy because it accurately describes how politicians act to try and move public opinion in the direction they prefer.
How Does This Phrase Apply to the Debt Ceiling?
The debt ceiling is a problem. The huge amount of spending by the federal government is also a problem. The two problems are intertwined.
Will Social Security recipients continue to get their checks? Will old people by dying in their houses due to the lack of money as a result of actions or the philosophy of one political party or the other?
Perhaps, but it is very unlikely.
Even with no increase in the debt ceiling and no new borrowing, there’s more than enough money to service the existing debt. According to the Treasury, in March federal receipts were $313 billion and interest payments were $67 billion. In April the receipts were $639 billion and interest $62 billion. There is no month of the year when interest on the debt will outstrip federal tax receipts.
While our politicians have strong opinions and different philosophies about government spending, no one is really arguing that the U.S. will repudiate its debts. There is enough money to pay existing debt.
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The real question is how decisions will be made. If the debt ceiling isn’t raised, the Treasury could, should—and probably will—pay the interest due. This means spending less than Congress appropriated. Some federal programs would be slowed down, and some spending would at least be delayed until a political solution is reached.
That is most likely to happen by raising the debt ceiling through the political process. Neither side will get everything it wants. Old people will not by dying in the street. The United States will not default on its debts.
It is likely to mean interest payments may not be made for the G Fund until a later time. It may also mean that G Fund investments would be delayed. As the political pressure builds, decisions on this and other government obligations will be made and then implemented.
How Does the G Fund Help Prop Up the Debt Ceiling?
The Secretary of the Treasury cannot sell or redeem Treasury bonds held by TSP participants, but the Secretary does have the authority to “suspend the issuance of additional amounts of obligations of the United States if such issuance could not be made without causing the public debt of the United States to exceed the public debt limit.”
Also, the Civil Service Retirement and Disability Fund provides benefits to retired and disabled federal workers covered by the Civil Service Retirement System. This money is invested in special-issue Treasury bonds. The federal government also borrows money from this source to keep the government running.
Federal employees and retirees are always “made whole” after the debt ceiling has been raised or the debt ceiling is suspended.
The G Fund of the Thrift Savings Plan (TSP) invests in short-term Treasury securities issued to the Thrift Savings Plan. As a result, the G Fund can be affected when the debt limit is reached. The principal and interest payments on these securities are still guaranteed by the Federal Government.
When it reaches the debt limit, the Treasury looks for ways to manage its cash and borrowing to continue funding the government. One way it does this is by suspending investments of the G Fund.
U.S. law authorizes the Secretary of the Treasury to suspend issuing additional amounts of investments to the G Fund if investments cannot be made without causing the debt limit to be exceeded. This happens with the debt limit is reached.
No doubt, this makes many G fund investors nervous. The G fund is the largest fund in the Thrift Savings Plan. When the Treasury Department takes this action, investments in the G Fund are still protected, and G Fund earnings are guaranteed under the Thrift Savings Plan Investment Act of 1987. The G Fund continues to accrue earnings, and earnings are updated each business day. Loans and withdrawals are not affected.
When the “disinvestment” period ends, the G Fund securities are reconstructed as if the suspension never happened. In other words, the G Fund is used as an accounting gimmick to give the federal government more time to work out the problem with the debt ceiling.
Presumably, the ceiling will again be raised before there is a government default although there is no guarantee of that happening again this time around.
The TSP has issued a statement about the current debt limit situation and its impact on the G Fund:
G Fund and the debt limit — As of January 23, 2023, the U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 30 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected. Learn more about the debt limit on the U.S. Department of the Treasury website.
Frequently Asked Questions
What is the debt ceiling?
The debt ceiling is the maximum amount the United States government can borrow by issuing bonds. The debt ceiling was created under the Second Liberty Bond Act of 1917 and is also known as the debt limit or statutory debt limit. If the federal debt reaches this limit, the Treasury Department resorts to” other “extraordinary measures” to pay government obligations and expenditures until the ceiling is raised again.
What is the G Fund?
The G Fund is part of the federal government’s Thrift Savings Plan (TSP) for federal employees. Investors’ money is invested in short-term U.S. Treasury securities issued to the TSP. Payment of principal and interest is guaranteed by the U.S. government. The Fund is considered not to have any “credit risk” but the actual return for investors may be diminished by inflation.
