The so-called debt ceiling, the amount the US government can borrow to meet its spending obligations, may seem like an abstract political issue for congressional leaders to address, but millions of Americans could take very serious financial hits. real if the conflict is prolonged. in.
On Thursday, the federal governmentof $31.4 trillion, prompting US Treasury Secretary Janet Yellen to invoke “extraordinary measures” that will allow the country to avoid an unprecedented default for at least the next several months.
Because US debt is considered the foundation of the global financial system, in part due to its stability, a default could undermine economies around the world. Back home, many Americans would likely see their wealth decline as the stock market recedes, reducing the value of their 401(k) plans. Social Security recipients and other dependents of government programs may not receive their monthly checks.
“Not raising the debt ceiling could have significant consequences on the economy and on us,” Jill Schlesinger, a business analyst for CBS News, said on CBS This Morning. “We could see things like delaying Social Security checks. You may not get your tax refund on time.”
Here are three ways Americans could feel the impact of the debt ceiling crisis on their personal finances.
If there’s one thing the stock market doesn’t like, it’s uncertainty. The longer debt-ceiling negotiations drag on in Congress, the more cautious Wall Street will express about the potential for a worst-case outcome: an unprecedented US debt default.
The last time Congress came close to the debt limit was in 2011, when the federal debt was $14 trillion and the Republicansto raise the ceiling just days before a default. But investors were unsettled even without a default, and the risky policy sent shares tumbling.
“The last time we had a big impasse, the stock market fell 14% in 4 weeks,” Schlesinger said, referring to the 2011 trade.
That would add to investors’ financial woes after last year’s stock market crash, when the S&P 500 plunged more than 19%.
Moody’s Analytics chief economist Mark Zandi estimated in 2021 that a US government default would cause theby a third and wipe out $15 trillion in family wealth.
Rising borrowing costs
Stocks weren’t the only financial assets affected during the 2011 debt crisis. Due to the conflict, which drove up the cost of borrowing, debt ratings agency Standard & Poor’s downgraded US debt for the first time. . The lower rating undermined investor confidence in the federal notes.
A default would likely drive rates higher, said Kathleen Day, a business professor at Johns Hopkins University. “The cost of home, car and credit card loans would skyrocket,” she said in an email. “In short, non-compliance would cause chaos.”
Most Wall Street analysts and political experts consider a full default unlikely. Still, such an outcome cannot be ruled out, and it would come at a time when consumers are already facing higher borrowing costs due to the series of interest rate hikes by the Federal Reserve last year.
An increase in interest rates linked to the debt ceiling could put more people out of the housing market or put expensive items like buying cars out of reach.
Cuts to Social Security, Medicare
The debt limit fight poses several risks for seniors on Social Security and Medicare. Without a breakthrough in Congress, the government may not be able to send out monthly benefit checks or pay for Medicare, the health insurance program for older Americans, if it no longer has the money to meet its obligations.
However, not everyone agrees with this assessment. University of Texas at Austin economist James K. Galbraith, former economist for the House Banking Committee and former executive director of the Joint Economic Committee of Congress, recently wrote that Social Security, Medicare and other programs are mandatory spending. That means the US is required by law to pay for these benefits.
“The US Treasury must comply with the law. Debt ceiling or no, it cannot legally default on any obligation,” Galbraith said.
Still, most Social Security recipients probably aren’t eager to test whether they’ll actually get their checks if the gridlock continues.
Meanwhile, House Republicans have signaled they want spending cuts in exchange for agreeing to raise the debt ceiling. Among the ideas that have been discussed isto claim Social Security benefits at 70, from today’s 66 or 67, and to push back the age to claim Medicare to 67, from today’s 65.
In essence, this would amount to a significant cut in benefits for Americans, since they would lose two to three years of benefits on each program. Republicans say those cuts are necessary to maintain the solvency of the programs.
Experts, however, say there are many other options, such as raising the payroll tax or removing the cap on earnings subject to Social Security tax. Currently, earnings over $147,000 are not subject to employment tax.