What the debt ceiling means for Social Security and more? – Community News
Social Security

What the debt ceiling means for Social Security and more?

The federal government will be unable to pay its bills in about two weeks — and that could delay benefits to tens of millions of retirees, Medicare and Medicaid providers, and countless others who receive checks from the U.S. Treasury.

Reaching the federal borrowing limit could lead to a catastrophic default on the national debt. Once the government has hit the ceiling — and exhausted all other measures to keep payments flowing — it will run out of money for the bills it has already promised to pay.

To avoid such a disaster, Democrats are considering an amendment to the filibuster rules to hold a vote. Senator Mitch McConnell of Kentucky, the minority leader, has proposed allowing a temporary raise until December, although that would only postpone a standard deadline by a matter of weeks.

The government has never failed to meet its obligations, so what would happen is unclear. But the effects can be far-reaching, with programs as diverse as Social Security benefits and school lunches.

“There is no public playbook for what to do if you exceed the debt limit,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a tax watchdog group. “We don’t know what’s going to happen.”

Many, many people.

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

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

Some state-run programs that use federal money, such as programs that offer breakfast and lunch to low-income students for free or at a discount, may not be refunded immediately. The Supplemental Nutrition Assistance Program, formerly known as food stamps, would also be affected.

And it would likely halt payments to families under the recently expanded child tax credit, which began sending eligible families half of the credit in monthly installments in July. In July, about 35 million families received the benefit.

That’s not entirely clear. Treasury Secretary Janet L. Yellen has said the government will reach the debt ceiling on Oct. 18. But some analysts think the actual date could be delayed a few days or maybe longer.

It’s important to note that this situation is different from a government shutdown, which happens when Congress fails to pass bills authorizing new spending. White House officials warn that hitting the debt ceiling is much more damaging.

Yes, the Treasury will get some revenue — from estimated quarterly income taxes, excise duties and other sources — but the Department has maintained that it doesn’t have the authority to choose which payments it will make.

“There is only one viable option for dealing with the debt cap: Congress should increase or suspend it, as it has done about 80 times, including three times during the last administration,” a Treasury Department spokesman said.

But if no agreement is reached, some policy experts say the Treasury will ultimately have to pick winners and losers — and that’s a difficult task, as several conflicting laws are at play.

The law says the government can no longer borrow once it reaches the debt limit, but the 14th Amendment to the Constitution says the United States must honor its obligations. Other laws state that certain benefits and salaries must be paid.

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

“They could ignore the debt limit,” he said. “It’s a question that has never been assessed because it hasn’t come up before.”

But previous governments have rejected that approach, he said, and legal experts disagree on whether it would really work.

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

The taxes coming into the program aren’t enough to pay for all the benefits, according to Jason J. Fichtner, chief economist at the Bipartisan Policy Center, who has held several positions, including acting deputy chief of police, at the Social Security Administration. But since the checks are sent in instalments, the agency could wait for more money to come in, which would result in delayed payments.

But there is also at least one other possibility. If the Treasury redeemed the special-issue bonds from the program’s trust fund to pay distributions — and then quickly replaced them with newly issued bonds — that wouldn’t raise the debt ceiling, Mr. Fichtner argues.

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

If the United States stopped paying its debts — that is, stopped paying the Treasuries it sold — it would almost certainly have major ramifications in global markets.

The immediate effect would be that portfolios of investors as varied as pension funds and holders of 401(k)s would face a downward spiral in the market. Even after a potential deadlock over the debt ceiling was resolved, global investors would demand higher interest payments on US Treasuries so that government borrowing could become more expensive in the future.

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

“In the event of a debt default, this would quickly lead to a credit crunch, making the issue for borrowers much more of whether you can get a loan at all,” said Greg McBride, chief financial analyst at Bankrate.com. “Lenders would probably freeze or reduce lines of credit on lines of credit and credit cards. Personal loans would be harder to get and could see higher rates.

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

“Even in the best-case scenario where the deadlock is short-lived, the economy is likely to suffer sustained – and completely avoidable – damage, especially given the challenges Covid-19 poses to the health of the economy,” they wrote.

If it dragged on into November, the federal government would have little choice but to cut government spending significantly by about $200 billion — a “devastating” blow to the economy, Mark Zandi, chief economist at Moody’s Analytics, said in a recent analysis.

And the higher cost of borrowing would only add to the hit in the long run.

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