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 providers, and numerous others receiving checks from the U.S. Treasury.

Running into the federal borrowing limit could lead to a catastrophic default on the nation’s debt. Once the government reaches the ceiling — and exhausts all other measures to keep payments flowing — it will run out of funds for bills it has already promised to pay.

To avoid such a calamity, Democrats are weighing a change to filibuster rules in order to hold a vote. Senator Mitch McConnell of Kentucky, the minority leader, has suggested allowing a temporary increase until December, although that would merely postpone a default deadline for a matter of weeks.

The government has never defaulted on its obligations, so what would happen is unclear. But the effects could be wide-ranging, covering programs as varied as Social Security benefits and school lunches.

“There is no public playbook for what to do when you breach the debt limit,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a fiscal watchdog group. “We don’t know what will 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 some form.

It could also delay payments to government contractors, including hospitals that accept patients who use Medicare and Medicaid benefits. If the situation dragged on for weeks or months, it could threaten access to health care, Whitney Tucker, the deputy director of research on 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, like those providing free or reduced-cost breakfast and lunch to low-income students, might not be immediately reimbursed. The Supplemental Nutrition Assistance Program, formerly known as food stamps, would also be affected.

And it would probably halt payments being made to families under the newly expanded child tax credit, which in July began sending eligible families half of the credit in monthly installments. Roughly 35 million families received the benefit in July.

When could this happen?

That’s not totally clear. The Treasury secretary, Janet L. Yellen, has said the government will hit the debt ceiling on Oct. 18. But some analysts believe the actual date could be pushed back a few days, or perhaps longer.

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

Won’t the government still have some money?

Yes, the Treasury will have some revenue coming in — from estimated quarterly income taxes, excise taxes and other sources — but the department has maintained that it does not have the authority to pick and choose which payments it will make.

“There is only one viable option to deal with the debt limit: Congress needs to increase or suspend it, as it has done approximately 80 times, including three times during the last administration,” a Treasury spokesman said.

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

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

Is there anything else the government could do?

The Treasury might decide to issue more bonds anyway and leave it to the Supreme Court to figure out the constitutional questions, said Len Burman, an institute fellow at the Urban Institute.

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

But previous administrations have rejected that approach, he said, and legal experts don’t agree about whether 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 bit different from other programs because it is largely financed through a dedicated payroll tax. It also has its own trust funds, which may give it more flexibility, some experts said.

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

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

It’s not clear whether the Treasury agrees with his assessment.

What else could happen?

If the United States were to default on its debts — that is, stop making payments on the Treasurys it has sold — there would almost certainly be major consequences in the global markets.

The immediate effect would be that portfolios held by investors as varied as pension funds and holders of 401(k)s would face a market tailspin. Even after any debt-ceiling standoff were resolved, global investors would demand higher interest payments on U.S. Treasury bonds — so the government’s borrowing in the future could become more expensive.

A default may also make it more difficult for consumers to secure loans, and they would most likely pay more when they did.

“In the case of a debt default, it would quickly spark a credit crunch so the issue for borrowers becomes much more about whether you can get a loan in the first place,” said Greg McBride, chief financial analyst at Bankrate.com. “Lenders would likely freeze or cut credit lines on home equity lines of credit and credit cards. Personal loans would be harder to get and could see higher rates.”

What if the problem isn’t quickly resolved?

An extended impasse 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 a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained — and completely avoidable — damage, particularly given the challenges that Covid-19 poses to the health of the economy,” they wrote.

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

And the increased expense of borrowing would only add to the hit in the long run.

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