WASHINGTON (TND) — The U.S. may be approaching an unprecedented default on its debt in as short as 10 days if the White House and lawmakers don’t find a compromise to raise the debt ceiling before the Treasury Department runs out of money to pay for the country’s obligations.
What happens next is somewhat unknown due to the unprecedented nature of a default, but all estimates warn of rapid and severe economic damage to an economy that is already trying to withstand high inflation and interest rates.
It could also affect key programs many low-income Americans rely on to get by, which could be cut off or delayed in a scenario where the U.S. runs out of money.
“We take the debt ceiling seriously as a constraint on our ability to pay bills that are coming due,” Treasury Secretary Janet Yellen said on Sunday on “Meet the Press.” “And my assumption is that if the debt ceiling isn’t raised, there will be hard choices to make about what bills go unpaid.”
The U.S. could hit the “X-date,” or run out of funds to pay its bills, as soon as June 1, though estimates on that from Treasury and outside groups have varied by several weeks and are highly dependent on uncertain timing of tax inflows.
Negotiators on both sides of the aisle have been adamant the U.S. will not default, but getting close to the deadline can still come with consequences.
A look at what could happen in a default or nearing one:
It’s not totally clear what would happen with Social Security, and it is considered to be unlikely that checks would not be sent out, but there is a potential for delays in payments being made.
Around 66 million people receive Social Security benefits each month, many of whom rely on the money as a primary source of income. Advocates have warned that any delays in payments could quickly result in difficult financial choices for retirees.
Whether payments are delayed could also be a matter of the calendar and what day the U.S. would reach a hypothetical default. Social Security payments are sent out on different days of the month based on beneficiaries’ birthdates, which could result in a scenario where some retirees receive benefits while others do not because Treasury ran out of cash.
The program’s trust fund could help the Treasury Department continue making payments, but if they can still be made on time and at the full rate is uncertain.
In a letter to Congress, the National Committee to Preserve Social Security and Medicare said a default would also jeopardize Medicare and Medicaid payments to doctors and hospitals. Failure to make those payments could result in delays in care and treatments.
A default could lead to about 1.4 million active military members not being paid or facing delays of unknown timeframes without receiving a paycheck.
“What it would mean realistically for us is that we won't, in some cases, be able to pay our troops with any degree of predictability," Defense Secretary Lloyd Austin said at a Senate Appropriations Committee hearing earlier this month. "And that predictability is really, really important for us. But this would have a real impact on the pockets of our troops and our civilians."
Benefits for retirees, veterans and survivors would also be in uncertain territory with delays and no clear timeline of when they would resume. The Military Officers Association of America said payments for disability benefits and educational programs through the Department of Veterans Affairs are likely to be delayed or stopped, and programs for mental health, caregivers and veterans without a home could also be disrupted.
More than 2 million federal employees would also be in a similar situation where they would be asked to come to work but have no guarantee of a paycheck. Other government assistance programs like food stamps and education grants also risk going unpaid.
The U.S. would not have to reach a default to have its credit rating dropped.
Standard & Poor’s cut the U.S.’ rating during a 2011 debt ceiling standoff even though an agreement was reached in time, citing concerns about budget deficits. That scenario could play out again with other agencies as the federal deficit has grown significantly since then and Congress and the White House are once again going down to the wire in negotiations.
Wall Street had one of its worst weeks ever during the 2011 debt ceiling standoff after the S&P downgrade. Economists say interest rates would also likely increase for everyone, making it more expensive to borrow money and more difficult for average Americans to receive a loan for things like a car, house or to put purchases on a credit card.
Scope Ratings, a major European credit rating agency, placed US credit ratings under review for a possible downgrade earlier this month.
“If a solution is not reached before June, policymakers may be playing daily Russian Roulette with the full faith and credit of the United States, risking financial disaster for their constituents and the country. Even now, the looming deadline is raising costs to the government, and therefore to all taxpayers.” Shai Akabas, director of economic policy at the Bipartisan Policy Center, said in a statement.
While it’s not totally known what would happen if the U.S. were to default, all analyses have found the scenario would be catastrophic to the economy.
According to the White House Council of Economic Advisors, political brinksmanship allowing the country to near default would result in a small recession while a prolonged default would result in a Depression-like recession costing 8 million jobs and a 45% decline in the stock market, wiping away retirement accounts and savings for millions.
Moody’s Analytics said 1 million jobs could be lost in a week after a default, with unemployment rising and economic decline getting worse the longer it drags out.