What the debt ceiling means for Social Security and more

The federal government is about two weeks away from being unable to pay its bills – and that could delay benefit payments to tens of millions of retirees, Medicare and Medicaid claimants, and many more receiving treasury checks American.

Republicans in Congress are blocking Democrats from raising the federal borrowing limit, which could lead to a catastrophic default on the nation’s debt. Once the government hits the cap – and exhausts all other measures to maintain payments – it will run out of funds for the bills it has already promised to pay.

The government has never failed in its obligations, so how it all works is not clear. But its impact could be far-reaching, including social security benefits and school lunch programs.

“There is no public manual on what to do when you go over the debt limit,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a budget watchdog group. “We don’t know what’s going to happen.

What programs could be affected?

A lot, covering a lot of people.

A default could potentially – but not necessarily – delay the payment of Social Security benefits, which reach about 65 million Americans in one form or another.

It could also delay payments to government contractors, including hospitals that accept patients who use Medicare and Medicaid benefits. If the situation continued for weeks or months, it could threaten access to health care, said Whitney Tucker, deputy director of research in the state budget policy team at the Center on Budget and Policy Priorities, in a recent note.

Some state-run programs that use federal money, such as those that provide free or discounted breakfast and lunch to low-income students, may not be reimbursed immediately. The supplementary nutritional assistance program, formerly known as food stamps, is also said to be affected.

And that would likely stop payments to families under the newly expanded child tax credit, which in July began sending eligible families half the credit in monthly installments. About 35 million families received the allowance in July.

When can this happen?

It is not entirely clear. Treasury Secretary Janet L. Yellen has said the government will hit the debt ceiling on October 18. But some analysts believe the actual date could be pushed back a few days, or even more.

Importantly, this situation is different from a government shutdown, which occurs when Congress fails to pass bills authorizing new spending. White House officials warn that going over the debt ceiling is far more damaging.

Will the government not have the money yet?

Yes, the treasury will collect revenue – from estimated quarterly income taxes, excise taxes and other sources – but the ministry has maintained it does not have the power to choose which payments it will make. .

“There is only one viable option to deal with the debt ceiling: Congress must raise it or suspend it, as it has done about 80 times, including three times under the last administration,” said a spokesperson for the Treasury.

But if no deal is reached, some political experts say the Treasury may ultimately have to pick winners and losers – and that’s a difficult connection, as there are several conflicting laws at play.

The law says the government cannot borrow once it reaches the debt limit, but the 14th Amendment to the Constitution states that the United States must honor its obligations. Other laws stipulate that certain benefits and salaries must be paid.

Is there anything else the government could do?

The Treasury could decide to issue more bonds anyway and leave the constitutional questions to the Supreme Court to resolve, said Len Burman, a fellow of the Urban Institute.

“They could ignore the debt limit,” he said. “This is an issue that has never been decided because it has never been raised before.”

But previous administrations have rejected this approach, he said, and legal experts disagree that it would actually work.

What about Social Security?

Social Security – which reaches tens of millions of Americans through retirement, disability, and survivor benefits – is a little different from other programs because it is largely funded by a dedicated payroll tax. It also has its own trust funds, which can give it more flexibility, some experts have said.

The taxes entering the program are not enough to pay for all the benefits, according to Jason J. Fichtner, chief economist at the Bipartisan Policy Center and who has held several positions, including that of acting senior deputy commissioner, in the Social Security Administration. But since checks are sent in installments, the agency could wait for more money to come in, causing payment delays.

But there is also at least one other possibility. If the Treasury repaid the special issue bonds from the program’s trust fund to pay for the benefits – and then quickly replaced them with newly issued bonds – it wouldn’t increase the debt ceiling, says Fichtner.

It is not clear whether the Treasury agrees with its assessment.

What else could happen?

If the United States were to default on its debts – that is, stop paying the treasury bills it sold – there would almost certainly be major consequences in world markets.

The immediate effect would be that portfolios held by investors as diverse as pension funds and 401 (k) s holders would face a market downturn. Even after any deadlock over the debt ceiling is resolved, global investors would demand higher interest payments on US Treasury bonds – so government borrowing in the future could become more expensive.

A default can also make it harder for consumers to get loans, and they would likely pay more when they did.

“In the event of a default, that would quickly trigger a credit crunch, so the problem for borrowers becomes a lot more whether you can get a loan in the first place,” said Greg McBride, financial analyst chief at Bankrate.com. “Lenders would probably freeze or reduce lines of credit on home equity lines of credit and credit cards. Personal loans would be more difficult to obtain and could see higher rates. “

What if the problem is not resolved quickly?

A prolonged standoff would cause significant damage to the U.S. economy, wrote Wendy Edelberg and Louise Sheiner, both senior fellows at the Brookings Institution, a research group, in a recent report.

“Even in the best-case scenario where the stalemate is short-lived, the economy is likely to suffer lasting – and completely preventable – damage, especially given the challenges that Covid-19 poses to the health of the economy. They wrote.

If this continued until November, the federal government would have no choice but to dramatically cut government spending by around $ 200 billion – a “devastating” blow to the economy, said economist Mark Zandi chief of Moody’s Analytics, in a recent analysis.

And increasing borrowing expenses would only increase the blow in the long run.

“Americans would pay for this defect for generations,” he said.