youOn Thursday, the United States reached its debt ceiling of $31.4 trillion, raising economic concerns about what will happen if lawmakers can reach a deal to pay off US government debts. The Treasury Department has begun using a series of “extraordinary measures” to prevent the government from defaulting on its debt, giving the US about six months to raise the debt ceiling or find a creative way out. .
Treasury Secretary Janet Yellen has said she doesn’t expect Americans to feel the effects before June, but that Congress needs to negotiate a solution quickly. No one knows what would happen if the US defaults on its debt, which would be a historic first, but experts warn it is likely to turn into a global financial crisis.
As long as tax revenue does not fully cover government programs such as defense spending, social programs, and government salaries, which it has done every year since 2001, the government must borrow money, but it is restricted by a set limit on the amount of debt the US can incur. Under the US Constitution, Congress must approve all loans, so Congress implemented the debt ceiling more than a century ago to avoid approving every new debt. Since then, lawmakers have raised the debt ceiling dozens of times.
“It’s the responsibility of Congress,” Eric Swanson, an economics professor at the University of California, Irvine, tells TIME. “If you are going to pass a law that spending is this and taxes are this, then whatever the difference is, it has to be debt. The law that authorizes the debt must be approved”.
Swanson is hopeful that Congress will avert disaster by eventually agreeing to raise the debt ceiling, but “they could push it very close to the deadline,” he says. “There is a lot of disagreement these days.”
How could the fight against the debt ceiling affect you?
Financial Markets and 401(k)s
A US debt default would threaten the value of bonds, stocks and the US dollar, unfolding in a global market already burdened with high inflation and interest rates, a possible recession and multiple geopolitical crises.
In short, it would be terrible for the financial markets and for anyone with a 401(k) retirement account.
The Dow Jones Industrial Average has fallen nearly 1,000 points in the past two days as Wall Street braces for the potential shock. Companies like JP Morgan and Goldman Sachs are already strategizing for the future.
A similar showdown to raise the debt ceiling in 2011 lowered the US credit rating for the first time, and there was a big push to sell shares. The mere threat of reaching June without a solution may scare investors into seeking international stocks and foreign government bonds. A default would likely cause investors to lose confidence in the US’s ability to service its bonds, which have historically been seen as some of the safest investments.
“No one knows for sure what will happen, because it has never happened before. We’ve had these debt ceiling run-ins, the Treasury has taken these extraordinary measures before, and the run-ins have always been resolved,” says Swanson.
“So I guess there’s a big question as Treasury gets to the end of these extraordinary measures, is there anything else they can do? Is there something else up Treasury’s sleeve that they haven’t told anyone?” he adds.
Social Security and Medicare recipients
About 20%, just over $1 trillion, of the federal budget went to Social Security and about 13%, more than $760 billion, went to Medicare in 2022, making them two of the largest programs funded by the federal government. No interruptions to these programs are expected at this time.
However, if the government defaults on its debt, that could cause delays in Social Security and Medicare payments, along with other key programs like veteran’s benefits and SNAP food assistance.
To address the debt ceiling, House Republicans have begun discussing spending cuts on entitlement programs. Some Republicans have discussed cuts to Social Security and Medicare, though the party is far from united behind that strategy. Lawmakers are likely to prioritize funding for Social Security and Medicare, especially since they are popular with a key voting bloc: older Americans.
“If Social Security payments were late, voters would go completely nuts,” says Swanson. “That would be very expensive politically for both parties and I think neither party wants that to happen.”
The 2022 filing period for the Internal Revenue Service (IRS) is from January 23 to April 18. The IRS estimates that taxpayers will receive their tax refunds within 21 days of filing their taxes electronically, which is good news for taxpayers because any effects of fighting the debt ceiling likely won’t occur until June or later. The tax filing process should proceed as normal.
The IRS typically announces adjustments to tax brackets in October or November, along with new tax provisions. These annual updates adjust taxes to keep up with the cost of living, so depending on inflation this fall, adjustments for 2023 could be small or significant.
One likely result of how the government will retain enough funds to continue borrowing is to suspend federal pension investments. The Federal Employees Retirement System is considered one of the best retirement plans available, reserved for the nearly two million civilian federal employees. The pension investments must be made complete once the debt ceiling crisis is resolved.
“There are a lot of federal employees, so it’s actually a lot of money,” Swanson says.
Seasoned federal employees are all too familiar with the longest government shutdown in US history that halted all non-essential government operations for 35 days between 2018 and 2019. Similar consequences were threatened last month when Congress stalled on passing a federal spending bill.
The $1.7 trillion spending package that Congress devised after lengthy bipartisan discussions will fund the federal government through September 30, 2023, when the fiscal year ends. At that point, Congress will need to pass a new spending bill, or the government will shut down, which could leave thousands of government employees on furloughs without pay, like the more than 800,000 employees deemed non-essential in the shutdown. 2019.
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