Time is running out for a deal to avoid a historic default on the nation’s debt, and Treasury Secretary Janet Yellen has warned the US could run out of money to pay the bills before June 1 . and Republican lawmakers when the parties appeared to have deadlocked.
Exceeding the debt ceiling may sound esoteric, but financial experts warn that it could hurt Americans financially in a number of ways. This is what you should know.
What is the debt ceiling?
The debt ceiling, set by Congress, represents the maximum amount the federal government can borrow to pay off its debts. Raising the debt ceiling doesn’t authorize new spending, but it allows the government to fund its previously approved obligations, ranging from Social Security payments to military salaries.
Not raising the debt ceiling is “like going to a restaurant, looking at the menu, seeing how much everything costs, and when you get the check, saying, ‘It doesn’t matter, I can’t afford that much,'” he said. Jacob Channel, Senior Economist at LendingTree.
Has the United States ever exceeded the debt ceiling?
No, although it has 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 ratings agency Standard & Poor’s to downgrade US debt for the first time. The stock market plunged, with the Dow losing 17% in the weeks surrounding the crisis.
“It’s hard to overstate how bad that would be,” Channel said.
How would a debt ceiling breach affect my 401(k)?
A default would rock global financial markets, prompting many investors to sell their stocks and bonds. Prices would plummet, though how severe the hit would be is unknown since the US has never been in such a situation.
“There is a strong possibility that there will be a significant disruption in the US financial markets.” if a breach occurs, said Tony Roth, chief investment officer at Wilmington Trust. “Frankly, you would find the whole country would be up in arms over the disruption it would cause to the financial markets.”
Will I still get my Social Security payment?
Social Security recipients may not receive their checks on time, experts say. With 66 million beneficiaries, 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 US defaults, “it is unlikely that the federal government will 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 pointed out, federal workers and members of the military may not get paid. The US would have to decide which payments to prioritize with the money it still has available, and could choose to keep paying interest on its bonds to avoid a debt write-down instead of paying federal wages.
“It could be that they decide, ‘Hey, we’re not going to pay any government employees this week,'” Patrick Gourley, an associate professor of economics at the University of New Haven, said in an interview with Government Executive, a publication that covers the federal government.
What about Medicare and Medicaid?
Both could be disrupted, potentially affecting care for older Americans with Medicare and low-income households that rely on Medicaid. A total of 158 million people are enrolled in Medicare and Medicaid, nearly half the US population.
“Get your health care now. Don’t wait until June 1,” Sara Rosenbaum, a professor of health law and policy at George Washington University, told Axios. “My message to the world is don’t wait for that orthopedic surgery.”
Would it affect my credit cards?
A leak is likely to increase the broader cost of borrowing by raising interest rates, including on credit cards.
That would hurt. Credit card APRs are already at record levels, reaching nearly 21%, the highest level since the Federal Reserve began tracking APRs in 1994. And consumers already owe nearly $1 trillion on their cards. credit, an increase of 17% from last year and a record.
How would a debt ceiling breach affect mortgage rates?
Buying a home could become even more expensive because a default would force the Treasury Department to pay higher interest on its bonds to convince investors to stay, and mortgage rates and other borrowing costs tend to follow Treasury rates. .
Mortgage rates could rise to 8.4% in September, up from 6.9% now, if the debt ceiling is breached, according to Zillow. That would make a typical home mortgage payment 22% more expensive and likely “freeze” the market, the real estate company said.
Would the United States fall into a recession?
Even a brief debt-ceiling breach of a week or less would likely send the economy into a recession, Mark Zandi, chief economist at Moody’s Analytics, said in a recent report. A brief gap would be “enough to undermine the already fragile US economy,” Zandi wrote.
But if the gap lasts longer than that, the US could slip into a “deep recession,” with employers cutting 7.8 million jobs and the unemployment rate jumping to 8%, or nearly double its current level, Zandi predicted.
How long could a debt ceiling default last?
Given the outage, which would affect anyone with a 401(k) or who relies on government programs, the uproar is likely to force the White House and Congress back to the negotiating table to find a solution quickly, say the experts.
“If we do have a default, the dislocation would be so great that the default would not last very long because the pressure would be so intense to fix the situation,” said Wilmington Trust’s Roth. “It would only last a couple of days.”