U.S. Treasury Taps Retirement Funds as Debt Limit Reached
May 16, 2011
Mission accomplished! The U.S. government officially reached its debt ceiling today and began tapping into federal retirement funds to stay afloat.
In a letter to lawmakers today, Treasury Secretary Timothy Geithner declared a “debt issuance suspension” period that allows the government to take money from the Civil Service Retirement and Disability Fund and Government Securities Investment Fund. (Public protests from federal workers about the looting of their retirement funds are coming to a street corner near you. Stay tuned.)
The U.S. Treasury’s issuing of $72 billion in bonds and notes today pushes the U.S. government to the brink of its borrowing limit, according to an unnamed Treasury official cited by Reuters.
Geithner has already given Congress an August 2nd deadline to increase the government’s borrowing bap by $2 trillion over the $14.294 trillion limit or else. President Barack Obama agreed saying a failure to increase the U.S.’ debt limit might cause disruptions to the global financial system and cause economic pain domestically.
While tapping into federal retirement funds to pay for non-retirement liabilities is a definite punch below the belt for federal workers, it’s just the tip of the iceberg in financial perversity we’re likely to witness in the near future. Simply put, the U.S. government’s liabilities are truly awesome.
Take Medicare, a government sponsored health program for the elderly and disabled, for instance.
Medicare will become insolvent five years sooner compared to estimates given in last year’s report by its trustees. Starting in 2024, Medicare won’t be able to pay for all the health care benefits it’s promising. Saying that Medicare will run out of cash in 13 years instead of saying by 2024 helps the mind to better understand how close to doom it is.
The 'Flight to Safety'
How has the Treasury market reacted to all of this ominous news? Over the past year, exchange-traded funds or ETFs linked to U.S. Treasuries have gently risen. The iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT), which owns long-dated Treasuries, has increased by 6.35% over the past year. Likewise, Treasuries with intermediate durations between 7-10 years (NYSEArca: IEF) have increased by roughly 7.50%.
Put another way, bond investors (NYSEArca: AGG) have seemingly shrugged off the U.S. government’s fiscal problems. They continue to buy U.S. debt and get returns that gently rise. There are no signs of a violent correction (yet), so everything must be OK. Isn’t this what a “flight to safety*” is all about?
Regardless of Treasury market’s calm readings**, people close to the center of the storm aren’t hoodwinked.
Economist Robert Reischauer, one of two public trustees for Social Security and Medicare, said, "Under current law these vitally important programs are on unsustainable paths." Come to think of it, if that statement doesn’t fittingly sum up the U.S. government’s entire fiscal situation, what does?
*One of mainstream media’s favorite ways to refer to U.S. government bonds. Why did the crowd pile into Treasuries? Why of course “It was a ‘flight to safety!’”
**Past performance is no guarantee of future results.