What’s the debt ceiling and how is it related to the stock market?
Countries, like people, can have debt. Countries can also borrow money to pay down their national debt. The amount of debt a country can carry is its debt limit, or debt ceiling. But even though it sounds like it’s just an issue for the government, if the United States hits its debt ceiling, it could become an issue for you and your personal finances.
The U.S. debt ceiling and payments to its citizens
The U.S. Department of the Treasury manages the country’s money. The debt limit—or ceiling—in the United States “is the total amount of money that the U.S. government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”
Once the debt limit is reached, Congress must act to raise it. If that doesn’t happen, the country could be unable to pay its bills for budget items that have already been approved. But this isn’t just a bill-paying issue for Washington, D.C., because some of those bills are paid to U.S. citizens. If the country defaults—i.e., is unable to pay its debts—anyone who relies on Social Security payments, Medicare, or even a military salary might not receive their money or benefits.
Why are we talking about the debt ceiling now?
In January 2023, the government officially reached its approved debt limit, but the Treasury Department stepped in, allowing the government to use “extraordinary measures” to postpone hitting the limit while Congress and the president negotiate to increase it. This week, U.S. Treasury Secretary Janet Yellen warned the government that it will run out of cash on June 5 and default on its debt if the ceiling isn’t raised.
Even though we’ve come close to the debt ceiling before, Congress has always increased it in time. But even getting close to the limit can be cause for concern in the stock market. In 2011, when the United States was close to hitting the debt ceiling, the stock market fell, beginning several months of volatility (meaning the value of stock investments moved up and down significantly).
A timeline of stock market reaction to 2011's debt ceiling crisis
S&P 500 Index price history, 2011
How does the debt ceiling affect my retirement savings?
When the stock market goes through a lot of ups and downs, the investments you hold in your retirement account are also likely to go up and down in value. And although that can feel unsettling, it may not be the time to take action. These types of changes are usually short term and, historically, the market has always bounced back.
A timeline showing stock market fluctuations and long-term growth
S&P 500 1/1/71–5/30/23
Source: S&P 500, yahoo.finance.com, 2023.
The debt ceiling and your money
What happens in Washington, D.C., doesn’t always stay in Washington, D.C., and that can be the case when there’s a debt ceiling crisis. But to help keep it from having an impact on your retirement savings, you could consider letting the crisis pass without making drastic changes in your investments. Your retirement savings is a long-term goal that, over time, may be better off if you leave it alone during short-term volatility.
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