Brian Beutler February 7, 2011, 2:26 PM

Sen. Pat Toomey (R-PA) recently proposed a stop-gap measure to prioritize paying off interest on U.S. debt in the event that the country reaches its debt ceiling. Democrats have attacked this plan as a “pay China first” proposal, which will disadvantage American retirees and veterans who are also owed money by the Treasury.

But who would really get the money? Well, yes, China. But so too would many other countries, institutions, and individuals in the United States. The Christian Science Monitor has a handy breakdown here.

About 53 percent of U.S. debt held by the public was held domestically. Says CSM, “Within this slice, the largest category is individuals - Treasury notes are good solid additions to any portfolio. US individuals hold 12 percent of the country’s debt. Next under the domestic category comes the Federal Reserve, which holds 9 percent of US debt, then pension and retirement funds, mutual funds, and state and local governments.”

According to economist Dean Baker, who heads the Center for Economic and Policy Research, the debt is fairly spread out, but a disproportionate chunk is held by large financial institutions — the same institutions that triggered the financial crisis. That crisis, and the economic downturn it created, cost the Treasury a tremendous amount of revenue, and accelerated the country’s march toward its debt limit. Now, many of those same financial institutions want to be at the front of the line if the country nears default.

“Insofar as we face any immediate budget problems, the story is certainly the downturn,” Baker said in an interview. “Now if we actually got to a situation where we were bound by the debt ceiling, they’d say ‘oh, we get paid and everybody else has to fend for themselves.’”

Toomey’s staff points out that servicing the public debt entirely can be accomplished with a small chunk of federal revenues. But without being able to incur more debt, the government would fall short on about one-third of its other expenditures — including, potentially, Social Security payments and veterans benefits. Under his plan, debt-holders would be kept whole while the political fight over the debt limit played out.

“The implication is that if you don’t pay off the creditors, they’re going to retaliate, but if you don’t pay off seniors, they won’t,” Baker says. “That may prove right — this isn’t a legal issue, it’s not even a moral issue… it’s first and foremost a question of how people will react.”

Toomey has built a fair amount of support for his legislation among Senate Republicans, though some remain hesitant. Late last week, the lobbying arm of Citizens Against Government Waste encouraged other Senators to back the plan.

“If the debt ceiling is not raised, the nation can avoid debt default, but it will not be able to escape the drastic spending cuts necessary to fill the budget hole,”said President Thomas Schatz. “CCAGW urges all members of Congress to work toward making important spending cuts now, and to insist that any increase in the nation’s debt limit be subject to substantial budget reductions.”

Debt, Debt Ceiling, Pat Toomey, Spending