The Debt Ceiling Could Hurt Feds’ Paychecks—But Only If Things Drag On

With the new Congress showing every sign of starting at a standstill over the debt ceiling standoff, some feds are already asking how the squeeze might affect their pay and benefits.

Last week, the federal government ran past its borrowing limit, forcing the Treasury Department to begin working around the problem to keep U.S. debt instrument holders paid and government functions going. These “extraordinary measures” include suspending reinvestments in parts of the TSP and other unnerving though, assuming normalcy returns, reversible steps. Major federal employee unions and advocacy organizations, representing hundreds of thousands of workers—including the National Active and Retired Federal Employees Association—are expressing their concerns, as their experts weigh in on the risks and urge Congress to resolve the issue. 

“There is a renewed discussion of budget cuts, particularly as part of the debt ceiling debate, absolutely,” John Hatton, staff vice president for policy and programs at NARFE, told Government Executive. “And some of the proposed savings Republicans are seeking might come from federal employees’ compensation.” 

“The pressure is hitting right now, starting with passing the first deadline last week and Treasury’s extraordinary measures to keep money flowing,” Hatton said, “And meanwhile House Republicans are seeking to get spending cuts in exchange for their votes to lift the debt ceiling.”

What, if anything specific, might get cut is up for grabs. Still, hearing Hatton’s list of federal pay and benefits that could be ransomed to avoid a government default—and a shutdown—is, let’s just say, not uplifting. 

“When you look at past budget proposals that have been made by some of these Republicans, whether from the Trump administration or different congressional budget proposals, you see things like eliminating or reducing cost of living adjustments—COLAs, freezing or lowering the rate of return for federal employees through the TSP G Fund, reducing government’s share of retirement contributions, limiting government contributions to the Federal Employee Health Benefits Program, and more,” Hatton said. “There’s just a whole host of proposals that if enacted would cut into earned benefits and reduce the value of them to federal employees.” 

“In play” as legislative bargaining chips is one thing. But which among these, if any, is actually most likely to be cut or trimmed? 

“On what might happen, and what exactly might get cut, it’s tough to say—it's quite early,” Hatton hedges. But he says early—now—is a good time for feds to discuss and push back, well before an estimated June drop-deadline for Congress to reinfuse the government with borrowing power. 

“I think it’s possibly helpful to feds that we’re talking about this so early in this Congress,” Hatton said. “Because people are sounding the alarm bells right now—as opposed to at the last minute, a few months from now when ‘extraordinary measures’ will no longer be able to delay a real debt ceiling crisis.” 

Pressed for his bets on possible outcomes—from the passage of cuts hitting feds specifically to no passage of a debt ceiling boost causing economic crisis—Hatton replied only that to him this is the most perilous moment, one plausibly leading to these long-threatened possibilities. 

“You know, so far these things have tended to work themselves out,” he said. “But that’s the past and that’s no guarantee that it will work out OK in future. I do think there is the risk of a ‘black swan’ type of event, where things don't work out, where there's no agreement in Congress—and it creates a lot of problems for the economy.” 

In a less dire vein, Hatton said that even if Congress managed to stumble ahead and raise the debt ceiling, a delayed and messy process meantime “could still create delays on people getting checks—their annuity checks, their paychecks, even lead to shutdowns.” 

Another expert on the current big “if” in Washington and how it might affect feds, Rachel Snyderman, senior associate director of business and economic policy at the Bipartisan Policy Center, told Government Executive, “Right now it’s certainly not time yet to panic for federal workers and retirees.” 

But, like Hatton, Snyderman added that if Congress’s current failure to find a resolution to the debt ceiling drags on right up to the deadline “it's impossible to predict the exact economic impact of a U.S. default.” 

“I think budget battles are clearly going to be more intense this year,” she said. “But as appropriation season gets underway here, we look forward to President Biden releasing his budget in the coming weeks, and all eyes will be on the appropriations process and parallel, ongoing negotiations over the debt ceiling and these issues.” 

“We know that even flirting with this, with defaults, as lawmakers choose inaction over how to address the debt limit has lowered confidence and raised costs in the past. We saw that in Congress’s 2011 standoff over spending and debt, for example, and in other instances which did increase borrowing costs for the U.S. government and which taxpayers ultimately must pay for.” 

“If the worst happened and we were to find ourselves in a situation where the United States defaulted, it would be unprecedented—and would carry a great cost to federal employees and American households more generally. It would hit federal and military pay and benefits, and veterans benefits would go unpaid or be delayed too.”

For the moment, Snyderman counseled calm. “The current counting maneuvers made available to the Treasury Secretary to deploy are working,” she said. “They buy lawmakers time, and there should be no impact on federal employees or federal retirees—at least not in the short-term.” 

BPC, a nonpartisan think tank, has published a debt ceiling reform proposal and NARFE has posted a fact sheet on the debt ceiling issue. Other major federal employee organizations, such as the National Treasury Employees Union, are also expressing their concern. 

“As Congress and the White House begin discussion on the debt limit, NTEU will continue fighting to protect employee pay and benefits and ensure that the government does not default on its obligations,” that union said in a recent statement.