How the Debt Ceiling Deadlock Could Affect Your Social Security Checks? – Community News
Social Security

How the Debt Ceiling Deadlock Could Affect Your Social Security Checks?

Legislators have less than three weeks to raise the debt limit or risk an initial bankruptcy, which would trigger a wide-ranging sell-off in the market and strangle everything from government payments to the ability to borrow.

“It is imperative that Congress tackle the debt cap quickly,” Treasury Secretary Janet Yellen said in comments to the Senate Banking Committee.

If you don’t do anything, it could cause an economic catastrophe, Yellen also said.

“Nearly 50 million seniors are temporarily unable to receive Social Security checks. Troops may go unpaid. Millions of families dependent on the monthly child tax credit may be delayed.

“In a matter of days, millions of Americans could be strapped for cash.”

More from Personal Finance:
The cost of living adjustment to Social Security could be 6% by 2022
This is the age at which Americans say they plan to retire
3% of near-retired people can answer all of these Social Security questions

The federal debt is the amount the government currently owes for spending on payments such as Social Security, Medicare, military salaries, and tax refunds.

The debt limit allows the government to finance those existing obligations.

“Raising the debt ceiling does not allow additional taxpayer money to be spent. Instead, when we raise the debt ceiling, we are actually agreeing to increase the country’s credit card balance,” Yellen said.

In the worst-case scenario, the federal government would default, at least temporarily, in meeting some of its obligations, including those of Social Security, veterans’ benefits, and federal employee salaries.

Social Security, which was established in 1935, has never missed a benefit. However, audits could be delayed for weeks or even longer if Congress fails to raise or suspend the debt limit, the National Committee to Preserve Social Security and Medicare recently warned.

Social Security funds itself, but the program draws money from its trust funds, including government bonds, to pay benefits.

Potential downgrades in US credit ratings would put treasuries in trouble. Demand for US Treasuries could fall if they are no longer considered a reliable, safe investment, and bondholders would demand drastically higher interest rates to offset the increased risk.

That, in turn, would also push up other borrowing costs, including credit cards, auto loans, and mortgage rates (which are generally linked to US Treasury yields).

The uncertainty alone can affect loan conditions and loan availability.

Yiming Ma

assistant professor of finance at Columbia University Business School

At the very least, fear of default could rattle the stock market and send shockwaves throughout the economy, said Mark Hamrick, senior economic analyst at Bankrate.com.

“If you go back to ten years ago, there was an instant sell-off in the financial markets – it hit investors hard and runs the risk of a cascading financial crisis,” he said.

In 2011, a stalemate over the debt cap in Congress nearly defaulted the country before lawmakers finally struck a deal, but not without a downturn in the country’s creditworthiness and significant market volatility.

Between July and October of that year, the S&P 500 fell more than 18%.

This time around, lenders can tighten their standards ahead of time to reduce their exposure — or risk — during a controversial battle, it said. Yiming Ma, assistant professor of finance at Columbia University Business School.

“Only the uncertainty can affect lending terms and loan availability,” she said.

“If I were someone about to take out a loan, I would look at the terms now,” Ma added. “There may be a frenzy going on in the last few days.”

“We know from past deadlocks over the debt cap that waiting until the last minute could seriously damage business and consumer confidence, increase borrowing costs for taxpayers and negatively impact the creditworthiness of the United States in years to come.” Yellen wrote in a press release. letter to House Speaker Nancy Pelosi Tuesday.

Congress and the White House have changed the debt ceiling nearly 100 times since the end of World War II, according to the Committee on a Responsible Federal Budget. In the 1980s, the debt ceiling rose to nearly $3 trillion from less than $1 trillion. In the 1990s, it doubled to nearly $6 trillion, and doubled again in the 2000s to over $12 trillion.

In 2019, Congress voted to suspend the debt cap until July 31, 2021. Now, the Treasury is using temporary “emergency measures” to buy more time so the government can continue paying its obligations to bondholders, veterans and Social Security recipients.

“We now estimate that the Treasury Department is likely to exhaust its extraordinary measures if Congress does not act to raise or suspend the debt limit by Oct. 18,” Yellen said in the letter to Pelosi.

“At that point, we expected the Treasury to be left with very limited resources that would soon run out.”

Lorie Konish of CNBC contributed to this report.

Subscribe to CNBC on YouTube.