Debt Ceiling Standoff Puts Social Security Payments, Investments at Risk

What’s worse: a government shutdown or failure to raise the debt limit? A shutdown sounds more serious, but failing to raise the debt limit would mean the first U.S. government debt default in history and all the complications it brings.

“The federal government would have to significantly cut back spending, [which] would probably mean delaying about $80 billion in payments due November 1 to Social Security recipients, veterans and active duty military for as long as two weeks,” writes Mark Zandi, chief economist at Moody’s Analytics in a new report.

“Financial markets would surely be roiled” with spiking interest rates and plunging equity prices. Global investors would sell or stop buying U.S. debt, and the Federal Reserve would have to shore up purchases of Treasury bonds, according to Zandi.

If the impasse lasted through all of November, writes Zandi, the Treasury would have to eliminate a cash deficit of about $200 billion, which would be equivalent to a cutback that annualized would top 10% of GDP. “This economic scenario is cataclysmic.”

Simulations by Moody’s Analytics of a U.S. government default show GDP declining by almost 5% from peak to trough on an inflation-adjusted basis, 6 million jobs lost and unemployment spiking to nearly 9%.

Treasury Secretary Janet Yellen is very concerned.

In a recent op-ed in the Wall Street Journal she warned that “nearly 50 million seniors could stop receiving Social Security checks for a time, troops could go unpaid,“ millions of families who rely on the monthly child tax credit could see delays, and “the current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost….

“The higher cost of borrowing would fall on consumers. Mortgage payments, car loans, credit card bills — everything that is purchased with credit would be costlier after default.”