Personal finance

As U.S. hits debt ceiling, here’s what it could mean for Social Security and Medicare

The clock is ticking for the U.S. to avoid a default on its debt, and some are sounding the alarm about potential disruptions to Social Security and Medicare.

On Thursday, Jan. 19, the U.S. outstanding debt hit its statutory limit.

The debt limit or debt ceiling is the total amount of money the U.S. can borrow to meet its legal obligations including Social Security and Medicare benefits, as well as military salaries, tax refunds, interest on the national debt and other payments.

In a Jan. 13 letter, Treasury Secretary Janet Yellen warned House Speaker Kevin McCarthy, R-Calif., Senate Majority Leader Chuck Schumer, D-New York, and other congressional leaders of the possible “irreparable harm” that could come to the U.S. economy, Americans’ livelihoods and global financial stability if the problem goes unresolved.

“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Yellen wrote.

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On Thursday, the U.S. began taking “extraordinary measures” to avoid defaulting on its obligations, Yellen wrote in an updated letter to congressional leaders.

The Treasury Department cannot provide an estimate of how long the government can expect to pay the government’s obligations through extraordinary measures, according to Yellen. But it is unlikely that cash will be exhausted before early June, she said.

Negotiations over the federal debt ceiling mark one of the first big challenges the new Congress will face.

McCarthy has agreed to tie lifting the debt ceiling to spending cuts. That has advocates for Social Security and Medicare worried that lawmakers will try to amend those programs.

“We’re looking at as early as June for a train wreck on this issue,” said Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare.

“The consequences are dire, because a default would not only disrupt Social Security and Medicare benefits, but also cause a global economic recession or worse,” he said.

How benefit payments could be delayed

If the U.S. were to default on its debt, it would be unprecedented.

The big question is whether the Treasury Department would be able to prioritize what does and does not get paid if that occurs.

Unlike a government shutdown, where Social Security and Medicare benefits continue to flow, that may not be the case with a default, according to Adcock.

“There’s a good chance that benefits for retirees and people with disabilities and survivors would be disrupted,” he said.

Even a short delay could interfere with beneficiaries’ ability to pay for health care, food, rent, utilities or other necessary expenses, the National Committee to Preserve Social Security and Medicare said in a statement on Thursday.

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The Treasury Department may be able to prioritize some payments, and that would include Social Security, said Jason Fichtner, chief economist at the Bipartisan Policy Center who previously served in several senior roles at the Social Security Administration.

However, the Social Security Administration may delay payments to ensure it has enough cash on hand, he said.

Meanwhile, Medicare payments may fluctuate, while other areas like federal employee salaries and food benefits through SNAP (the Supplemental Nutrition Assistance Program) may stop. The process may be politically “messy,” Fichtner said.

“Social Security I’m sure will get paid, interest on the debt will get paid,” he said. “After that, flip a coin, who gets paid?”

Why some worry about Social Security benefit cuts

As House Republicans plan to focus on curbing government spending, some worry that could entail cuts to Social Security benefits and Medicare in exchange for votes to increase or suspend the debt limit.

Among the ideas Republicans have pitched include raising Social Security’s full retirement age to 70, changing the way benefits’ annual cost-of-living adjustments are measured to make them less generous, or making it so benefits are means tested through the middle class, Adcock said.

Moreover, they could raise the Medicare eligibility age to 67 from 65, he said.

To make those changes, there would need to be enough support in the Senate, with 60 votes.

“That’s a pretty high threshold,” Adcock said. “I don’t think there would be 60 votes in the Senate to do benefit cuts.”

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The White House has also indicated it is not willing to negotiate.

“As President Biden has made clear, Congress must deal with the debt limit and must do so without conditions,” White House press secretary Karine Jean-Pierre said Tuesday.

For Social Security reform to progress successfully, both parties would need to come to the table and be willing to make concessions, Fichtner said.

Without such a bipartisan legislative proposal on paper by June, it would be difficult to include Social Security in the debt ceiling negotiations, he said.

“With Social Security, you’re going to have to have a grand bargain that includes changes to the benefit formula and revenue increases,” Fichtner said.

“And that’s just not something that they can get done in a debt crisis environment,” he said.

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