Debt Default: How 'Economic Chaos' Could Affect Average Americans

ACROSS AMERICA — Millions of Americans could see delays in Social Security and Veterans Administration benefits — and, if they’re soldiers or working federal jobs, their paychecks — if Congress fails to raise the nation’s borrowing limit of $31.381 trillion.

If President Joe Biden and congressional leaders of both parties are unable to come to an agreement in high-stakes meetings this week, the government may run out of money to pay its bills as soon as June 1. It would be the first time in history the United States has defaulted on its debt.

Treasury Secretary Janet Yellen said on ABC’s “This Week” Sunday there are “no good options” for the United States to avoid economic “calamity” before the Treasury Department runs out of “extraordinary measures” it has been using to operate under the debt cap, which was reached on Jan. 19.

“Whether it’s defaulting on interest payments that are due on the debt or payments due to Social Security recipients or to Medicare providers, we simply would not have enough cash to meet all of our obligations,” she said. “And it’s widely agreed that financial and economic chaos would ensue.”

If Congress can’t come to an agreement, it doesn’t automatically mean government checks won’t be issued or that a loss of income would be permanent.

But for about 66 million Ameriucans who receive Social Security benefits every month, any interruption can be painful.

Additionally, about 5.2 million veterans and their survivors receive either pension or benefit payments every month, according to the Veterans Affairs Administration.

Adding uncertainty, the National Association of Government Employees union sued Yellen and Biden, arguing the law that limits the government’s total debt is unconstitutional. The lawsuit claims that if Yellen abides by the debt limit once it becomes binding, she would have to choose which federal obligations to actually pay once the debt limit bars the government from further borrowing.

Some analysts have argued that in that case, the government could prioritize interest payments on Treasury securities. That would ensure that the United States wouldn't default on its securities, which have long been regarded as the safest investments in the world and are vital to global financial transactions.

Also, about 2 million federal civilian employees and about 1.4 million active-duty military personnel could see their paychecks delayed.

And, the White House said anywhere between 200,000 to 8.3 million jobs could be lost depending on the length of a possible breach. Already in 2023, nearly 168,250 jobs have been eliminated in layoffs.

Democrats and Republicans are at loggerheads over whether the debt limit should even be the subject of negotiation. GOP lawmakers, led by House Speaker Kevin McCarthy of California, are demanding spending cuts, while Biden has said the threat of default shouldn’t be used as leverage in the budget cuts.

Raising the debt ceiling doesn’t authorize more spending. It only authorizes the federal government to pay for what Congress has already approved. Since 1960, the debt ceiling has been raised 49 times under Republican presidents and 29 times under Democratic presidents, according to the Treasury Department.

On Tuesday, Biden will meet with McCarthy, House Minority Leader Hakeem Jeffries (D-New York), Senate Majority Leader Chuck Schumer (D-New York) and Senate Minority Leader Mitch McConnell (R-Kentucky). It will mark the first substantive talks between Biden and McCarthy in months.

In a letter to McCarthy last week, Yellen warned that failure to increase the debt limit “would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”

Analysts have also warned if the government doesn’t approve more borrowing, Americans would take a direct hit in their investment portfolios. Even if it is resolved, stocks could lose about a third of their value, which would wipe out about $12 trillion in household wealth, according to Moody’s Analytics.

Treasury yields, mortgage rate, and other consumer and corporate borrowing rates would spike, at least until the debt limit is resolved and Treasury payments resume, according to Moody’s.

“Even then, rates would not fall back to where they were previously,” Moody’s said in a report when the debt limit was reached in January. “Since Treasury securities no longer would be perceived as risk-free by global investors, future generations of Americans would pay a steep economic price.”

The Associated Press contributed reporting.