Time is running out to reach a deal to avert a historic default on the nation’s debt, with Treasury Secretary Janet Yellen warning that the U.S. could run out of money to pay the bills by June 1. Breaching the debt ceiling may sound esoteric, but financial experts warn it cause hurt Americans financially in a number of ways. Here’s what to know.
What is the debt ceiling?
The debt ceiling, which is set by Congress, represents the maximum amount the federal government can borrow to pay its debts. Raising the debt ceiling doesn’t authorize new spending, but instead allows the government to fund its previously approved obligations, ranging from Social Security payments to military salaries.
Failing to raise the debt ceiling is “like going to a restaurant, looking at the menu, seeing how much everything costs and by the time you get the check, saying, ‘Never mind, I can’t pay this much’,” said Jacob Channel, senior economist at LendingTree.
Has the U.S. ever breached the debt ceiling?
No, although it’s come close several times before, most notably in 2011, when lawmakers agreed to raise the debt limit just days before the nation was about to exhaust its borrowing capacity. That led credit ratings agency Standard & Poor’s to downgrade U.S. debt for the first time. The stock market tumbled, with the Dow shedding 17% in the weeks surrounding the crisis.
“It’s hard to overstate how bad it would be,” Channel said.
How would a debt ceiling breach impact my 401(k)?
A default would rock global financial markets, spurring many investors to sell their stocks and bonds. Prices would plummet, although it’s unknown how severe the hit would be given that the U.S. has never been in such a situation.
“There is a great chance that there is meaningful disruption to the U.S. financial markets” if a breach occurs, noted Tony Roth, chief investment officer at Wilmington Trust. “You’d find the entire country would be up in arms, frankly, by the disruption that it would cause in the financial markets.”
Would I get my Social Security payment?
Social Security recipients might not get their checks on time, according to experts. With 66 million recipients, such a delay is likely to create financial hardship for many, especially seniors and other Americans who rely on Social Security as their main source of income.
If the U.S. defaults, “It is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security,” Yellen said in April.
Would federal employees get paid?
As Yellen noted, federal workers and members of the armed services might not get paid. The U.S. would need to decide what payments to prioritize with what money it still has available, and it could opt to continue paying interest on its bonds in order to avoid a debt downgrade rather than pay federal salaries.
“It could be they decide, ‘Hey, we aren’t going to pay any government employees this week’,” noted Patrick Gourley, associate professor of economics at the University of New Haven, in an interview with Government Executive, a publication that covers the federal government.
What happens to Medicare and Medicaid?
Both could be disrupted, potentially impacting care for older Americans on Medicare and low-income households that rely on Medicaid. A combined 158 million people are enrolled in Medicare and Medicaid — almost half the U.S. population.
“Get your health care now. Don’t wait until June 1,” Sara Rosenbaum, a health law and policy professor at George Washington University, told Axios. “My message to the world is, don’t wait on that orthopedic surgery.”
Would it impact my credit cards?
A breach would likely raise the broader cost of borrowing by pushing up interest rates, including on credit cards.
That would hurt. Credit card annual percentage rates are already at record highs, reaching almost 21%, the highest level since the Federal Reserve began tracking APRs in 1994. And consumers already owe almost $1 trillion on their charge cards, up 17% jump from last year and a record high.
How would a debt ceiling breach impact mortgage rates?
It could get even more expensive to buy a home because a default would force the Treasury Department to pay higher interest on its bonds to convince investors to stick around — and mortgage rates and other borrowing costs tend to follow Treasury rates.
Mortgage rates could surge to 8.4% by September, up from 6.9% now, if the debt ceiling is exceeded, according to Zillow. That would make a mortgage payment on a typical home 22% more expensive and likely “freeze” the market, the real estate company said.
Would the U.S. fall into a recession?
Even a short debt ceiling breach of a week or less would likely tip the economy into a recession, Mark Zandi, chief economist of Moody’s Analytics, said in a recent report. A short breach would be “enough to undermine the already-fragile U.S. economy,” Zandi wrote.
But if the breach lasted longer than that, the U.S. could fall into a “deep recession,” with employers cutting 7.8 million jobs and the jobless rate jumping to 8%, or about double its current level, Zandi predicted.
How long could a debt ceiling breach last?
Given the disruption — which would impact anyone with a 401(k) or who relies on government programs — it’s likely that the uproar would force the White House and Congress back to the negotiating table to quickly find a solution, experts say.
“If we have default, the dislocation would be so great that the default wouldn’t last long because the pressure would be so intense to fix the situation,” Roth of Wilmington Trust said. “It would only last a couple of days.”
