US debt ceiling limit reached; Social Security, Medicare targeted

By Doug Bailey

Congressional angst over the nation’s debt limit has once again summoned what poet and songwriter Shel Silverstein called “The Whatifs.” In this case, “Whatif the U.S. defaults on its debts?” “Whatif the government shuts down?” “Whatif my Social Security check is late or never comes?”

Such rumination and concern have become commonplace in recent years with the uniquely American sequence of elected leaders spending wildly and then later having to vote on whether to pay for their largesse. But the extreme partisanship now in a heavily divided Capitol Hill has seemed to propel the debate into scarier territory, with various players seriously jockeying to use the moment to leverage support for their pet issues.

This much we know: The U.S. Government reached its statutory borrowing limit on Jan. 19, and if the limit isn’t raised, the country could default on its $31 trillion of debt, something that’s never happened and would likely trigger disastrous economic consequences.

Though the limit has been reached, the doomsday scenarios won’t occur for months as the government has wiggle room and can invoke emergency methods to delay a default to perhaps June, though for how long is unknown.

U.S. Treasury Secretary Janet Yellen told lawmakers that "the period of time that extraordinary measures may last is subject to considerable uncertainty." Such measures include suspending new investments and redeeming holdings in the Civil Service Retirement and Disability Fund, and the Postal Service Retiree Health Benefits Fund.

But perhaps most worrisome for a huge number of Americans is the fact that cuts in Social Security and Medicare benefits appear to be tied to whether the debt limit gets raised. And it’s not only Republicans who are raising the specter of slashing trust fund accounts.

Manchin targets 'trust funds'

“Let’s take the trust funds: Medicare, Social Security, Highway Trust,” Sen. Joe Manchin (D-West Va.) told reporters while attending annual World Economic Forum meetings in Davos, Switzerland. “You can’t let those go defunct. What we’re saying is, we have a Trust Act. We would put bipartisan, bicameral committees together to look at each one of the trusts and come up with solutions of how you fix it.”

The administration has said it won’t negotiate over raising the debt ceiling, calling it a Congressional obligation, and progressives immediately attacked the notion of holding Trust Fund cuts hostage to the debate.

“It’s economically, fiscally, and morally irresponsible for the new House majority to be playing games with the debt limit and threatening an economic crisis – and there’s absolutely no reason for Sen. Manchin or anyone else to play along.” Lindsay Owens, Groundwork Collaborative

“It’s economically, fiscally, and morally irresponsible for the new House majority to be playing games with the debt limit and threatening an economic crisis – and there’s absolutely no reason for Sen. Manchin or anyone else to play along,” Lindsay Owens of the Groundwork Collaborative think tank said in a statement. “We saw this move in 2011 when politicians negotiated over the debt limit and ended up strangling the economy with years of devastating cuts for workers and families. We can’t let that happen again.”

Despite the huge cloud of uncertainty, the typical American likely takes the Congressional back and forth in stride, believing that it has little impact on their lives and that lawmakers eventually always come to agreement and life goes on.

In some respects, they’re correct. But “The Whatifs” really are lurking.

“While most individuals may think hitting the debt ceiling isn’t something that impacts them directly, the impacts could be felt in many different ways,” said Jason Steeno, president of CoreCap Investments and CoreCap Advisors, in Southfield, Mich.

Consumers could be impacted

Everyday consumers would be affected in several ways, he said, if the U.S. hits the debt ceiling and doesn’t raise it.

“Those collecting Social Security could see those payments paused or delayed,” he said. “Government workers and those in the military could go unpaid. Borrowers may have to pay higher interest rates on their loans, especially those looking for new mortgages which are tied to Treasury notes.”

Farther reaching impacts could be felt in the stock market due to a threat to corporate profitability, Steeno notes, and a U.S. government default could lead to longer-term effects such as a recession, increased job losses, and loss of income for millions of Americans.

“Even if the debt ceiling is raised in time, there are near-term challenges facing everyday Americans,” he said. “One of them is a potential downgrade of the U.S. credit rating, which would have a significant impact on Treasuries, both on yield and demand,” said Steeno. “This would lead to increased borrowing costs for credit cards, car loans, and mortgages. At the same time, lenders may also start tightening their lending standards in anticipation of increased risk of default.”

The Committee to Preserve Social Security and Medicare said in a post that it is more likely than ever that Social Security beneficiaries will feel the impact of a default. It also said that Medicare and Medicaid payments could be delayed if an agreement isn't reached.

But there’s no need to panic, experts said. At least not yet.

“We have seen this movie before,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, in Waltham, Mass. “While the ending could be really bad, every previous time we ended up resolving the problem before the world blew up. There are a couple of ways the problem could be solved before June.”

McMillan said the easiest and most likely course of action will be for Congress to come to a deal before June as the pressure mounts. But there are other scenarios that could evolve before things blow up.

A range of options

“Options range from the reasonably credible: using a line from the 14th Amendment of the Constitution to justify ignoring the limit entirely; to the reasonable but iffy: issuing lower face value bonds with higher coupons; to the borderline crazy: issuing a trillion-dollar coin,” said McMillan.

“The point here is not to dig into any of the options, but to show there are indeed options short of default," McMillan said. "As we saw in the financial crisis, the government is willing to do a lot of things previously unimaginable before letting the world blow up, and I am quite certain that would be the case here as well.”

Investment markets and consumers generally look through all this and go about business as usual while keeping an eye on machinations in Washington.

“This has happened before and will no doubt happen again,” said McMillan. “The headlines are making the most of what could happen, and the worst case would indeed be bad. But we have months to go from here to there, during which there are enormous incentives to cut a deal. And even if a deal is not cut? There are other, non-default options. There are many ways to solve this problem and only one way to fail – which means it really isn’t an option.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].