Credit Limit Reached: U.S. Treasury Department Suspends Pension Fund Payments

As the US government reaches yet another historic debt ceiling, requiring an additional $1.2 trillion credit increase from Congress just to keep the system from collapsing into a chaos, the first stop for a short-term loan is federal pension funds.

The US suspended investments into a federal employee retirement fund to avoid breaching the $15.194 trillion (Dh55.8 trillion) debt limit.

Treasury Secretary Timothy F. Geithner informed Senate Majority Leader Harry Reid of the move in a letter yesterday. The so-called G-Fund will be “made whole once the debt limit is increased,” Geithner said. Lawmakers this week will debate a symbolic vote on the debt limit. Under legislation passed in August after months of negotiations between the Obama administration and Republican lawmakers, the president has authority to veto any disapproval resolution that clears both chambers of Congress. The limit would then be raised on January 27. House Republicans plan to adopt a resolution tomorrow rejecting President Barack Obama’s request to raise the debt limit by $1.2 trillion, though the measure will die either in the Senate or by presidential veto. That will allow Obama to lift the cap on his own after Republicans have gone on record against it.

The debt-ceiling increase is to meet commitments already made by the government. The Treasury has been relying on accounting maneuvers to ensure the limit isn’t breached.

Source: Gulf News

As has been reported previously, pension funds and 401K retirement accounts may be the first place the US government goes if it ever runs into issues with funding debt. Currently, debt limit increases allow the Treasury to issue more bonds that are then purchased by investors like China, Japan, and of course, the Federal Reserve. If it so happens, however, that China and other foreign investors scale back their regular purchases significantly, the US government will be faced with a conundrum that could have extremely negative impacts on the domestic economy and the US dollar itself.

As a result, any debt funding problems faced by the Treasury will require unprecedented steps that may very well include the seizure and/or nationalization of retirement accounts.