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US hits borrowing limit — Treasury implements ‘extraordinary measures’ — here’s what it means for your 401Ks

by Chief Editor

CF news

 

The Treasury Department is starting ‘extraordinary measures’ to avoid a U.S. default after the federal debt limit was reached on Thursday. This measure will allow the government to keep paying bills while Congress negotiates to try and avoid an economic meltdown.

American debt is now at an eye-watering $31.38 trillion – that’s 120 percent of GDP, up from 39.2 percent in 2008 and 77.6 percent in 2018.

The staggering figure is the highest since the Second World War, equals $246,876 in federal debt per taxpayer and is more than the economies of China, Japan, Germany and the United Kingdom combined.

In a letter sent by Treasury Secretary Janet Yellen to House Speaker Kevin McCarthy on Thursday, she warned that the ‘period of time that extraordinary measures may last is subject to considerable uncertainty.’

The ‘extraordinary measures’ refers to accounting workarounds to ensure financial liquidity to keep the government open through at least June.

First, the government will temporarily suspend payments to the retirement, disability and health benefit funds for federal employees. Second, it will suspend the reinvestment of maturing government bonds in the retirement savings accounts of government workers.

Nearly 25 million full-time and part-time federal employees, or approximately 16 percent of the American workforce, will be affected if the debt debacle defaults in June.

As the DailyMail.com explains below, the spiraling debt and battle over it could have major implications for American citizens, particularly their 401 (k) plans.

The larger and more immediate impact for the estimated 159 million U.S. workers, is the economic uncertainty of retirement accounts, which have taken a huge hit following the global pandemic and Russia’s ongoing war on Ukraine resulting in historic inflation levels and ongoing supply chain woes.

Analysts at Bank of America cautioned in a report last week that ‘there is a high degree of uncertainty about the speed and magnitude of the damage the U.S. economy would incur.’

The 2022 selloff erased nearly $3 trillion from U.S. retirement accounts, according to Alicia Munnell, director of the Center for Retirement Research at Boston College. By her calculations, 401(k) plan participants have lost about $1.4 trillion from their accounts since the end of 2021, according to CBS News.

Markets remained relatively calm, given that the government can temporarily rely on accounting tweaks to stay open and any threats to the economy appear to be several months away.

The White House went on the offense.

‘They’re threatening to kill millions of jobs and 401K plans by trying to hold the debt limit hostage unless they can get cut Social Security, cut Medicare, cut Medicaid,’ said Press Secretary Karine Jean-Pierre during her regular briefing on Wednesday.

‘We’re just not going to negotiate that,’ Jean-Pierre said. ‘They should feel the responsibility.’

Republicans have said they will oppose raising the ceiling debt ceiling without a cut in federal spending, while the White House and Democrats are refusing to allow the GOP to cut federal programs such as social security.

‘Why create a crisis over this?’ McCarthy said this week. ‘I mean, we’ve got a Republican House, a Democratic Senate. We’ve got the president there. I think it’s arrogance to say, ‘Oh, we’re not going to negotiate about pretty much anything’ and especially when it comes to funding.’

If a deal is not made by the summer, the fallout could result in a global economic crisis. Since 1960 Congress has raised, extended or revised the debt limit 78 times when the U.S. hit its borrowing cap.

So far, House Speaker Kevin McCarthy and Biden are playing what could be a dangerous game of chicken with the world’s largest economy in the middle.

The results could be devastating for both taxpayers and the global economy, so DailyMail.com has broken down what to expect as both parties enter the ring and try and hash out detente.

The Treasury Department has limited options, but starting Thursday, the agency will be making a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until early June.

 

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