As of January 19, 2023, the U.S. reached its debt limit. As Treasury Secretary Janet Yellen wrote in her letter to Congress, the government now has to resort to “extraordinary measures” to avoid a default on national debt.
While the Democrat-led Senate and Republican-controlled House of Representatives work to find a bipartisan solution — likely raising the debt ceiling — many Americans might wonder what all this means for their own money.
Hitting the debt ceiling — and potentially raising it — has several economic impacts that are important for you to know about.
What Is the Debt Ceiling?
The debt ceiling is the maximum amount of money the government can borrow, instituted by Congress in 1917 to help deter over-borrowing. Since 1960, Congress has raised the debt ceiling 78 times.
The debt ceiling helps protect the government from reaching a point where it defaults on its debt — something that has never occurred before.
Where Does the Debt Ceiling Stand Now?
The current debt ceiling stands at approximately $31.4 trillion.
The extraordinary measures Yellen talked about include actions such as suspending investments in the U.S. Civil Service Retirement Fund, Kevin Barry, chief investment officer at Summit Financial, explains.
Though we’ve reached the debt ceiling, he says, that is not the same thing as defaulting on our debt, which won’t happen until later this year. Extraordinary measures buy Congress time to implement a solution.
“The ability to pay bills should run out by June or July. If no debt ceiling bill is passed, then Social Security payments could be disrupted and interest on government debt would go unpaid,” Barry says.
[Read: The Future of Social Security.]
How the Debt Ceiling Crisis Will Affect You
Since hitting the debt ceiling, the U.S. government has had to find ways to cut back on spending to avoid defaulting on payments. If it doesn’t implement a long-term solution soon, government-run programs might end up defunded.
Hitting the Debt Ceiling
“The ramifications on the average American if the U.S. government hits the debt ceiling is that we would no longer be able to borrow money and continue our current level of government spending. Entitlement programs like Social Security and Medicare may be on the chopping block,” Noah Schwab, certified financial planner at Stewardship Concepts Financial Services in Washington, says.
This has a clear impact on low-income Americans who rely on these services, but they won’t be the only ones affected.
The U.S. has never defaulted on its debt before, so there is no precedent to guide what exactly would happen in a debt ceiling crisis. But in addition to programs like Social Security and Medicare being at risk, we might also see delayed or missed payments for federal employee salaries and veterans benefits.
“Consider that in an average month, the federal government pays over $100 billion in Social Security benefits to 65 million retirees, over $48 billion in salaries and benefits to over 2 million civilian workers and over $1 billion in pension and disability compensation to over 5 million veterans and their families,” Brad Stroh, co-founder and co-chief executive officer at Achieve, says.
[MORE: Economy Begins ’23 Warmer Than Expected]
“Recipients of these vital funds risk not being able to meet their basic expenses at a time when households across the country are already bearing the brunt of rising inflation, soaring interest rates and high costs of goods and services,” he says.
Stroh notes that a debt ceiling crisis could affect the housing market, too, due to homebuyers being unable to access government-backed mortgages. Similarly, lenders might not be able to access government services that help ensure loans are repaid and the mortgage market is secure.
The IRS might also see delays in procuring funds necessary to issue refunds this tax season, Stroh says.
“With tax filing season upon us, taxpayers may experience a delay getting their refunds they were counting on to pay for upcoming large expenses, pay down debt and meet other financial obligations,” he says.
[READ: Why Tax Refunds May Be Smaller in 2023.]
What Happens If and When Congress Raises the Debt Ceiling
Even if Congress raises the debt ceiling and there’s not a default, there will likely be political ramifications that affect Americans.
“The historical precedent of the debt ceiling has always been to raise it. Because raising the debt ceiling requires both political sides to work together, it is often used as a bargaining chip to gain other desired policies,” Schwab says.
According to Barry, it might be as simple as Congress passing an increase to the debt limit, an option favored by Democrats. But Republicans have announced they would like to accompany any debt ceiling increase with a bill to reduce government spending.
As the parties work toward a compromise, it is possible, if not probable, that some reduction in discretionary spending is passed. How this will affect average Americans is to be determined.
Debt Ceiling Crisis: Other Economic Effects
In addition to the risks posed to the government programs Americans rely on, a debt ceiling crisis affects our economy as a whole.
“Government spending is a large part of our economy, and a reduction would create a negative ripple throughout our economy and could send us into a harsh recession. If that led to us defaulting on our debt, we would lose international credibility as an investment safe haven. This would make it more difficult for the United States to borrow in the future,” Schwab says.
Historical Precedent for Raising the Debt Ceiling and What’s Coming Next
“In 2011, the US was scheduled to ‘run out of money’ on July 31st. The new bill was signed on July 31st. In the several weeks leading up to the end of July, the stock market began to decline — perhaps as a signal from Wall Street to Washington that the time had come to solve this issue. I expect the same this year,” Barry says.
But that doesn’t mean you need to sit idly while Congress works. Now is the time to hope for the best but prepare for the worst — and take steps to shore up your financial security.
“Americans who depend on government programs need to develop a back-up plan in case they temporarily lose access to their benefits. That might include researching community resources for assistance paying utility bills and looking into food pantries that can support grocery needs. Revisit household budgets (now is the time to create a budget if you don’t already have one). Wherever possible, see if there are opportunities to save more. Even a little may go further than you think,” Stroh says.
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What the Debt Ceiling Crisis Means for Your Money originally appeared on usnews.com
