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What no new debt ceiling could mean to you

Here's what may happen if Congress doesn't raise the federal government's debt limit by Aug. 2. It won't be pretty.

By Karen Datko Jul 12, 2011 5:04PM

Who was it who said, "Can't we all get along?" If only politicians would listen to that.


If you think a failure by Congress to increase the nation's debt limit by Aug. 2 will only inconvenience some overseas investors who will lose confidence in the nation's desire to pay its bills on time, you are mistaken. The pain would likely be felt in many U.S. households.  Post continues after video.

First, some background: The government actually smacked into the $14.29 trillion debt ceiling on May 16, but has continued to pay its bills with the help of several complicated accounting maneuvers.


The debt ceiling needs to be raised so the government can continue to pay for spending that Congress has already authorized, NPR explained. That's right. The government doesn't spend money willy-nilly. Congress is in charge of that.


The Treasury Department has said that unless the debt ceiling is raised -- allowing the government to borrow more money -- the government won't have enough cash to meet all of its obligations come Aug. 2. It's estimated that federal spending would have to be slashed by 40%.


How would that play out? Hard to say since this is virgin territory. But here are some possible scenarios that could affect your bottom line:


No Social Security and other payments. Treasury officials "say that could mean stopping or limiting not only interest payments to debt holders, but also Social Security and Medicare payments, unemployment benefits, tax refunds and money owed to government contractors," John D. McKinnon wrote in The Wall Street Journal.


Another scenario is mentioned by Doyle McManus in the Los Angeles Times:

The Bipartisan Policy Center, a centrist Washington think tank, released a study last week analyzing the real-world consequences of a debt-limit freeze. The short answer: After paying the interest on the federal debt to stave off default, the Treasury would have to cut federal spending on everything else by about half. The government could cover Social Security, Medicare, Medicaid and military spending, but that's about all. Almost every other federal expenditure, including unemployment insurance, college tuition aid -- even FBI salaries and IRS refunds -- would have to stop.

It's unclear how the government would prioritize its spending. "Social Security recipients, who often rely on their check for daily living expenses, would probably be among the first in line (to get paid)," wrote Josh Sanburn at Time. "But so would bond holders: The government would likely do everything it could to protect its credit rating."

President Obama was asked about government benefits in a recent CBS News interview:

Well, this is not just a matter of Social Security checks, these are veterans checks, these are folks on disability, their checks. There are about 70 million checks that go out. ... I cannot guarantee those checks go out on August 3rd if we haven't resolved this issue because there may simply not be the money in the coffers to do it.

Massive government layoffs.Jim Puzzanghera of the Los Angeles Times said an impasse on the debt limit would "trigger a sort of slow-motion, partial government shutdown."


Even more government debt, which all of us would have to pay. If the U.S. defaults on its debt, investors would demand higher interest on future government securities. You know, like how it is when your credit score goes down when you don't pay your bills -- you face higher interest rates.


Bruce Bartlett, a former adviser to President Reagan, explained in "5 myths about the debt ceiling" in The Washington Post:

J.P. Morgan recently surveyed its clients and asked how much rates would rise if there was a delay in payments, even a very brief one. Domestic investors thought they would go up by 0.37 percentage points, but foreign buyers -- who own close to half the publicly held debt -- predicted an increase of more than half a percentage point. Any increase in this range would raise Treasury's borrowing costs by tens of billions of dollars per year.

Higher interest rates for all of us on all sorts of loans, including credit cards and mortgages. Treasury Secretary Timothy Geithner explained (.pdf file), "Treasury securities set the benchmark interest rate for a wide range of credit products, including mortgages, car loans, student loans, credit cards, business loans, and municipal bonds."


A big hit to retirement accounts -- again. "Additionally," Geithner wrote, "a default would substantially reduce the value of the investments -- including Treasury securities -- held in 401k accounts and pension funds, which families depend on for their retirement security."


How much would retirement savings shrink? "It depends on your allocations, of course, but some economists estimate that all of the gains from 2010 could be wiped out, while Third Way estimates that 401ks would lose an average of $8,816," Time said.

A possible return to a full-blown recession, with job losses estimated into the millions. As ProPublica notes, Geithner warned of that in the same letter to Sen. Michael Bennet, D-Colo. His words were: "catastrophic, far-reaching damage" to the economy. A letter sent to Congress by 235 economists warned, "Reaching the limit on total outstanding debt could force a dramatic and sudden cut in federal spending that would destroy jobs and threaten the recovery."  


More on MSN Money:

Jul 13, 2011 1:17PM

If our Government fails to provide Social Security to workers that have worked and paid into it for their entire working lives, watch out!

Angry seniors won't stand for it and would likely march on Washington DC and start "stringing up" politicians. Man would that be a great site to see, politicians swinging by the street lights. Bet things would change in a hurry after just 50 or so.  Angry

Jul 13, 2011 3:30PM
Pretty soon we'll be in the same boat as some of the European countries. When you take away peoples Social Security (which they paid for from their paychecks for DECADES-it's not an entitlement or charity- It's our money!!) just think about it. How many people are on Social Sec or SSI. They depend on this money for food, shelter and medical expenses. They have a right to it! They ought to arrest every politician that stole money from the fund (our money is supposed to be in a separate fund so how can they not pay it?) Those politicians STOLE OUR MONEY that we paid from our paycheck every week that we worked!
Another idea, how about laying off a bunch of the politicians. Since they can't seem to agree on anything with the number of people they have now, let's just cut down on the number of representatives and Senators and reduce their paychecks for the ones left! Maybe then they will be able to figure it out. I'm just plain sick of the people not compromising. Life is about compromise and I think the Dems have shown they are willing while the Repubs just sit there and say nope, we have to have everything we want. Well, everyone in this country does not agree with them!

Jul 13, 2011 10:57AM
Social Security payments for the most part are made from the FICA tax that is collected from current workers paychecks and a matching tax on employers.  The rest is made up from redeeming Treasury bonds that are held in the Social Security Trust Fund,  ( there is currently $2.6 trillion in this fund  and it projected to last 27 years ).  I have read somewhere that more than 95% of peoples Social Security checks are now covered by the current  FICA tax and the employer matching tax. So I guess you could say that  everyones Social Security checks are safe for a very long time. You should stop writing articles that are intended to scare senior citizens.
Jul 13, 2011 3:19PM

The government has $400 Billion worth of gold that it can sell and stay afloat through the end of the year.  In that time they have plenty of land and other assets that can be sold for a lot of money.


The trillions they get from all that selling will let them run the nation long enough to devise and implement a plan where they can live within our means.


August 2 is a scare tactic and fear mongering and political posturing.


On top of that the government collects $200 billion each month in taxes.  It costs $85 billion to service the debt and pay Social Security.


The only way SS checks don’t go out is if the President stops them so he can use the money for something else.  The GOP cannot stop the SS checks from going out, only the President can do that.


Jul 13, 2011 2:54PM
Isn't it interesting how fear is controlling everyone's lives these days.  Fear of another terrorist attack, fear of a debt default and the list goes on.  The people that project all of the terrible things that will happen if we default, don't really know what will happen, they are just guessing, because no one know exactly what will happen.  
Jul 13, 2011 2:33PM
I wonder what the Greeks are reading about the USA in their papers?  USA defaults on EVERYTHING!!  Let's just keep politics out of the equation.
Jul 13, 2011 6:59PM

If the Government Defaults, and can't live up to the financial obligations it has made through law and contracts; if the Government cannot provide for the General Welfare of it's People; is it not the right and duty of the People to declare the political and economic system a failure, and change the Political System by Calling a Convention of all the States to, "Right the Wrongs," and/or make changes by any means necessary?  Isn't this what Jefferson had in mind? 


"The Evil that Men Do Lives Long After Them."  The Government, Wall Street, and the large Corporate and Multi-Nationals have literally destroyed the future of our Children and Grand Children.  They deserve a  Political and Economic System that  works for ALL of the American People in a Fair, Just, and Equitable Manner.


When in the history of the World have the Rich and Powerful (greedy and selfish), ever made

made changes without somehow being FORCED to do so?   


Jul 14, 2011 3:09PM

The reasoning given by the President and Democrats for raising the debt ceiling is a reason that will only be used time after time with nothing ever being done to solve the debt problem.  The President agrees to cut cut spending.  If you cut your spending and get rid of your unconstitutional programs, you can pay down the debt and never need to continuously increase the debt limit.


The argument that GWB raised the debt limit numerous times; therefore Obama should be able to is B.S.  The fact is that neither should.  Cut the programs and live by budgets just as everyone that works has to do.


Lastly, prior to any tax increases, let's let everyone that works pay their "fair share".  A consumption or flat tax seems extremely fair.  Do away with the nightmare of the current tax system and cut the IRS by 90%.  Once "non-tax payers" start paying, they will understand that raising taxes is a big deal.

Jul 13, 2011 4:15PM



I'm fine with not getting SS. Just refund every penny that I put into it and I'll be cool. You don't even have to give me interest on MY money. In fact SS is voluntary go check the website. It's cool though, the Chairsatan Ben Bernanke will keep printing money so my gold and silver will go to $5000/oz and $500/oz respectively. Did you see the Bernanke today when Ron Paul asked him if gold was money and he said "No" then Paul asked why are all the central banks stockpiling gold. Bernank said "tradition", lolololololol!!!! If you believe that you are truly an idiot! Social Security is a Ponzi scheme just like our entire economy. Once the money stops flowing in, the music stops. We are seeing the End Game unfold right before our eyes. The global financial system is insolvent and nothing but a black hole of debt. Oh yea for all of the trolls who said that gold and silver are bubbles, please open your mouth 8=====o

Jul 13, 2011 3:55PM
Let me see if I have an understanding of this situation. Congress(in the form of the house of representatives) is willing to raise the debt ceiling and has a condition that tax increases are out of bounds and spending must be cut.  The president wants to raise the debt ceiling and agrees that spending needs to be cut.  The only thing that holding this up is the president's stipulation that a tax increase is part of the deal.  Why on earth can't the deal be done on the things they agree on? Only president Obama can answer that one. My guess is that he WANTS a tax increase to punish achievers. All of you who are casting blame need to pay attention to who is holding this deal up.
Jul 13, 2011 4:12PM

Typical Republicrat


"Congress agrees that tax increases are out of bounds and that spending must be cut."  The president agrees that spending must be cut."


You left out the little part, so typical, that the president also agrees for tax increases.  So, who is holding this deal up?  The party of NO, NEVER, EVER. The party of NO Compromise.  The party of NEVER ACCEPT ANYTHING OUTSIDE OUR TERMS.    The same party who voted OK for 8 previous debt ceiling raises with no issues while GWB was in office. 


I blame Democrats just as much for overspending on social programs that are writ with fraud because they can't police the very programs they support.  I just get sick and tired of people who point fingers at one side of the idiotic stupid trash sitting in congress when the probelm is on BOTH sides in BOTH houses.


It is like the new Republican soluition.  We will ask the president to put in a measure to raise the debt ceiling. We will vote NO on that measure.  The president can VETO that "no vote" on the measure, thus effectively allowing it to happen, unless the VETO is over-ridden by the vote needed.  This way, the Republipukes can get the debt ceiling raised and put the ENTIRE BLAME on the President becuase they will all look to the people with their big innocent faces like little kids and yell "Hey, WE VOTED NO and HE OVER-RODE OUR DECISION."  This, COMING from the very people who WANT to see the PRESIDENT FAIL far more than they ever have concern for FIXING THE PROBLEM.




Jul 13, 2011 5:19PM
I get SS disability and VA disability pay for my time server in the Navy (100 % service conn disability). I can not work no more , If I don't get my checks this month I will not be able to pay my bill or live at all. I feel they don't care about the people who in there military at all.  At times I wish I could still service my country but I can't do that .  Let get off your high horse and get pass and quite playing with people live hood now
Jul 13, 2011 6:42PM

No Social Security, veteran's assistance, and Medicare payments made, due to a shut down - - the rank and file will be urged NOT to pay any mortgage, credit card bills, and would initiate a Nation Wide Consumer Strike!  Further, Consumers will be urged not to pay any utility bills of any kind.  Same would be true for for loans on Motor Vehicles.


When Social Security and Veteran's assistance runs out, the Gray Panthers will hit the Streets.

 . . . And, when that happens, "the Big Dog is going Down!!


If this debacle isn't resolved by Tax Time, Payments will have to be held back.  People have to eat!



Jul 30, 2011 3:30PM
Government needs to sell surplus miliary equipment.  Get out of Iraq, South Korea, Afghanistan, Libya, Germany, and countless other countries where there are bases and start building the domestic economy.  I know it sounds simplistic, but in your household economy if you are underwater in debt, you try to do these things (usually also in this order:

1.  Sell assets
2.  Obtain a job (or another job)
3.  Cut spending

A fool seeks to keep current spending levels intact or increasing them, seeking another loan because they don't want to change spending behavior.  Are you telling me that the richest country on earth has no assets to sell?  Then to secure the future, the government should stop promising.  If someone has not begun to pay into SS they should not be obligated to make payments into the system.  

For all of you that support raising the debt ceiling, let me remind you that I agree with you that in the short term it will seem to fix the problem, until it happens again and again. 
Jul 13, 2011 4:20PM



The troll line isn't directed at you or the idiot stuff. just basically the first line about refunding my money for SS.

Jan 14, 2013 4:28PM
LOL.  As though the ceiling wont be raised.  If we had any poloticians willing to make tough choices we wouldn't be in this mess.  Our congress is the WWF.  After their TV appearances and speaches both sides go to each others homes for BBQ's and laugh at us.
Jul 13, 2011 3:46PM

People paid into SS, but they didn’t pay nearly enough to cover the cost of the benefits they get.


You also do not have a right to SS, the courts have already ruled on that in two separate cases and they have ruled that the government can stop or reduce benefits and that you have no right to the money.


When FDR tried to implement SS he told folks that they were paying premiums like they would to an insurance company or annuity and they had a right to it.  But when the matter was in the courts FDR insisted that the people do not have a right to any SS payments. And that’s how the courts ruled, it is not your money, it’s a tax and you do not have any right to it.

Jul 13, 2011 4:44PM

During the previous administration the debt ceiling was raised 8 times while extending tax cuts for the wealthy and cutting the capital gains tax rate.  Social Security and Medicare tax revenues were moved into the general fund and replaced with IOU's.  Since S.S. and Medicare taxes max out at a moderate income level, this all translates into a regressive tax system where lower wage earners (through income + SS + Medicare taxes) pay higher rates than those wealthy folk living off of capital gains - think Paris Hilton. 


Meanwhile we spent $1T in an underfunded war in Iraq and another $1T to bail out Wall Street crooks.  Most of this debt was incurred under the Reagan-era mantra 'deficits don't matter'.


Now the bills come due and the solution is to cut Social Security and Medicare benefits. Who's great idea is this, to balance the books on the backs of retirees?  It is the idea of some wealthy freshmen Congressmen who's assets and benefits are secure.  These guys get a pension after 3 terms, while they vote to cut your retirement benefits.


Do you want to live in a meritocracy or an aristocracy?  Once sufficient wealth and power accumulate at the top, say goodbye to this grand experiment in democracy.


The solution is simple; compromise.  Close those tax loopholes for corporate jets and oil exploration, and raise the debt limit.  However, this Tea Party Congress was elected for their in-your-face rhetoric and lack of basic political skills... like compromise.  They would rather run the economy into the ground than compromise.  Apparently the Tea Party can run a good pep rally but they cannot run a government; they lack the required basic skillset.


Jul 13, 2011 2:09PM

Part of me wants this all to go through just to watch all the "government doesn't create jobs" people squirm as they try to explain another spike in unemployment.


And yeah, in the upcoming triage of "who don't we pay" that'll come in this scenario, grandma's social security check may take a back seat to medicare and (more likely) defense spending.  Doesn't matter what the money came in earmarked for, SS would likely by less important than keeping soldiers out of the unemployment line.

Jul 13, 2011 1:52PM

I guess you could say that everyones Social Security checks are safe for a very long time. You should stop writing articles that are intended to scare senior citizens.


I disagree with both of your assessments.


"Social Security checks are safe"?


It's true that the Social Security trust has trillions on the deposit side of its ledger. But money is fungible, and these deposits have been noted on IOUs stapled to the ledger: "Money borrowed for other gummint uses 'today,' but, we promise to pay it back 'tomorrow.'" Thus, the desire is to make this future payback less onerous, by treating this (solvent) fund as part of the deficit spending problem.


One way is to now say SS payments must be cut; in this way you reduce the IOUs (eliminated SS: you don't have to pay back any of the IOUs). Another is to change conditions that qualify you for SS payments; again, you reduce the need for 100% IOU payback.


"Stop writing articles that are intended to scare senior citizens"?


Roosevelt's New Deal, with programs such as Social Security that would  provide benefits for citizens not only in the top 20 - 25% of the economy but also the bottom 75 - 80%, have been under attack since their inception. The current "Republican" legislators have made no secret of their desire to have a government (and a society in general) that taxes and spends with a view only to the investor class and the wealthy that provide campaign contributions and lobbyist / consultant / board jobs. Only if you're one of these folks do these Congressional Godfathers (La Tea Nostra?) work for you.


These folks aren't looking for ways to make social programs such as Social Security solvent. They're looking for ways to destroy the programs, and right now they think they're on a "starve the beast" roll with Treasury default.


Scare stories? Perhaps. But when they're true you should be scared. Very scared.

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