Social Security, Medicare, Federal Salaries: What payments can be delayed if the debt ceiling stalls

The US could be weeks away from being unable to pay its bills, an event that, if it were to happen, would likely be accompanied by large and painful financial consequences for American households.

Among the ramifications of a debt ceiling standoff, any federally issued payments such as Social Security, health care, tax refunds, military salaries, and many others could be delayed.

As an example, if the United States has only 80 or 90 cents of every dollar it owes, it will be forced to defer some payments.

“Someone is cheating,” said Michael Pugliese, a senior economist at Wells Fargo Economics.

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There are a lot of unknowns: how long any delays would last or whether the government would prioritize certain payments, for example. The United States has never been in this situation and the government has not released a public roadmap outlining its response, meaning that there is a certain amount of guesswork involved.

“We’re seeing a sort of contagion effect,” said Rachel Snyderman, senior associate director of economic policy at the Bipartisan Policy Center, a think tank. “The degree of contagion is unknown.”

The United States is in this situation due to a political deadlock related to the debt ceiling, also known as the debt ceiling. This ceiling is the amount of money the United States is allowed to borrow to pay its bills.

The nation runs a budget deficit, which means it spends more than it earns on revenue. He then has to borrow money to meet his obligations.

Congress periodically raises or temporarily suspends the debt ceiling to avoid the other scenario: a default on the national debt and other federal payments.

Here’s the current problem: The country hit its current debt ceiling of $31.4 trillion in January. Since then, the US Treasury Department has been able to move money and delay the so-called “X-date,” the day when the federal government can no longer pay its bills in full.

That date could be June 1, Treasury Secretary Janet Yellen said last week.

But a political impasse between Democrats and Republicans means that a deal has, thus far, been elusive.

If the US reaches Date X without a debt ceiling agreement, it would be the first time in US history that the federal government would intentionally renege on its financial promises.

This is where the assumptions about “who gets paid when” start to come into play. Some clues and educated guesses may help answer this question.

The government is likely to pay investors and financial entities holding US Treasuries first. These payments to bondholders would be for principal and interest.

Federal Reserve officials hinted at the likelihood of prioritizing bondholders at a 2011 meeting that followed a previous debt ceiling episode.

Not doing so would trigger a “technical default”. In other words, the US would default on debt payments.

While missing any federal payments would likely wreak havoc, the bond default scenario “is what would really trigger financial Armageddon,” Wells Fargo’s Pugliese said.

US Treasuries are the bedrock of the entire global capital structure, he said.

The market in Treasuries worth about $24 trillion is the “largest and deepest bond market in the world,” according to a Wells Fargo research note.

They are held by all types of global investors, such as US and foreign banks, insurers, pension funds, mutual and exchange-traded funds, sovereign wealth funds, and individuals.

Investors consider them a risk-free asset. Holding short-term Treasuries is theoretically “the only super safe thing you can do” with your money, Pugliese said.

“What does the world look like when nowhere is safe?” said the economist, asking a theoretical question.

In short: Investors could panic, dumping Treasuries and triggering a deep stock sell-off.

Rating agencies would likely downgrade US debt. Government borrowing costs would rise, as would those for households that have credit cards, mortgages, auto loans and other debts, which are tied to the US Treasury market.

Putting the bold first inevitably puts others second.

Prioritizing who comes next is the “big question mark” in the grand scheme of unknowns, said Snyderman of the Bipartisan Policy Center.

All federal payments are on the table. Delays could initially last a day or two, but would increase the longer a political impasse lasts, he said.

Most likely would be Social Security benefits and money for health programs like Medicare, Medicaid, the Children’s Health Insurance Program and the Affordable Care Act health plans, the experts said.

For example, the government is expected to pay about $100 billion each to Medicare and Social Security in June, dwarfing other categories of federal payments, according to a recent analysis by the Bipartisan Policy Center.

Deferring payments to federal health programs could mean, for example, some health care providers delaying enrollee care. Retirees, who can live on a fixed income, may struggle to pay bills, experts say.

Other payments may also be affected: federal tax refunds; the Supplemental Nutrition Assistance Program (also known as food stamps); payments to federal retirement plans such as the Thrift Savings Plan; educational programs such as Pell Grants; federal salaries such as those of judges and active duty military; benefits for veterans; and payments to defense suppliers and contractors, for example.

It is unclear whether the government would prioritize certain payments within these broad groups. The most likely scenario is that funds are issued chronologically based on when certain payments fall in the calendar cycle, the experts said.

“It is completely operationally, economically and legally untested,” Snyderman said. “We would be in uncharted territory.”