Deadlock on debt ceiling could delay Social Security and Medicare payments

The United States could be weeks away from being unable to pay its bills – an event which, if it occurred, would likely be accompanied by significant and painful financial consequences for American households.

Among the ramifications of a standoff over the debt ceiling, any payments issued by the federal government — like Social Security, Medicare, tax refunds, military paychecks and many more — may be delayed.

To illustrate, if the United States only has 80 or 90 cents for every dollar it owes, it will be forced to defer some payments.

“Someone is getting hurt,” said Michael Pugliese, senior economist at Wells Fargo Economics.

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There are many unknowns: how long a possible delay will take or whether the government would prioritize certain payments, for example. The United States has never been in this situation, and the government has not released a public roadmap outlining its response, which means there are a number of guesses involved.

“We’re looking at some sort of contagion effect,” said Rachel Snyderman, senior associate director of economic policy at the Bipartisan Policy Center, a think tank. “The degree of contagion is unknown.”

The United States finds itself in this situation due to a political impasse related to the debt ceiling, also known as the debt limit. This cap is the amount of money the United States is allowed to borrow to pay its bills.

The nation has a budget deficit, which means it spends more than it earns in revenue. It therefore has to borrow money to meet its obligations.

Congress periodically raises or temporarily suspends the debt ceiling to avoid the other scenario: a default on the national debt and other federal payments.

Here is the current problem: the country hit the debt ceiling – currently $31.4 trillion – in January. Since then, the US Treasury Department has been able to transfer money and delay the so-called “X date”, the day when the federal government can no longer pay its bills in full.

This date maybe as early as June 1, Treasury Secretary Janet Yellen said last week.

But a political deadlock between Democrats and Republicans means a deal has so far been elusive.

If the US reaches date X without a debt ceiling agreement, it would be the first time in US history that the federal government intentionally reneged on its financial promises.

This is where the hypotheticals around “who gets paid and when” start to come into play. A few clues and educated guesses can help answer this question.

Federal Reserve officials have hinted at the likelihood of prioritizing bondholders in a meeting 2011 which followed a previous episode of debt ceilings.

Failure to do so would trigger a “technical fault”. In other words, the United States would default on payment of its debt.

While missing any federal payments would likely cause chaos, the missed bond payments scenario “is what would really trigger financial Armageddon,” Wells Fargo’s Pugliese said.

US Treasuries are the foundation of the entire global capital structure, he said.

The treasury bill market – worth around $24 trillion – is the “broadest and deepest bond market in the world,” according to a Wells Fargo research note.

They are held by all kinds of global investors, such as US and foreign banks, insurers, pension funds, mutual funds and exchange-traded funds, sovereign wealth funds and individuals.

Investors view them as a risk-free asset. Holding short-term Treasuries is theoretically “the only super safe thing you can do” with your money, Pugliese said.

“What does the world look like when nowhere is safe?” said the economist, asking a theoretical question.

In short: Investors could panic, dump Treasuries and trigger a sell-off in stocks.

Rating agencies would likely downgrade US debt. Government borrowing costs would rise, as would those of households with credit cards, mortgages, auto loans and other debt, which are tied to the US Treasury market.

Putting the bold first inevitably puts the others second.

Prioritizing who comes next is the “big question mark” in the grand scheme of unknowns, said Snyderman of the Bipartisan Policy Center.

All federal payments are on the table. The delays could initially last a day or two, but would increase the longer a political stalemate lasts, she said.

The most significant would probably be Social Security benefits and money for health programs like Medicare, Medicaid, the Children’s Health Insurance Program and Affordable Care Act health plans, experts said.

For example, the government is expected to pay about $100 billion each to Medicare and Social Security in June, which dwarfs other federal payment categories, according to a recent Bipartisan Policy Center. analysis.

The deferral of payments to federal health programs could mean, for example, that some health care providers are delaying care for enrollees. Retirees, who can live on fixed incomes, may struggle to pay their bills, experts said.

Other payments could also be affected: federal tax refunds; the Supplemental Nutrition Assistance Program (also known as food stamps); payments to federal retirement plans like the Thrift Savings Plan; education programs like Pell Grants; federal salaries like those of judges and active-duty military; veterans benefits; and payments to defense contractors and contractors, for example.

It is unclear whether the government would prioritize certain payments within these major groups. The most likely scenario is that funds would be issued chronologically based on when certain payments fall in the calendar cycle, experts said.

“It’s absolutely untested operationally, economically, and legally,” Snyderman said. “We would be in uncharted territory.”