What the US Hitting the Debt Ceiling Means for You

What the US Hitting the Debt Ceiling Means for You

Thit the US debt ceiling of $31.4 trillion on Thursday, raising economic concerns about what will happen if lawmakers can reach an agreement to pay the US government debt. The Treasury Department has begun using a series of “extraordinary measures” to avoid a government default on its debt, which buys the US about six months to raise the debt ceiling or find a creative way out.

Treasury Secretary Janet Yellen has said that she does not expect Americans to feel the effects before June, but that Congress must find a solution quickly. No one knows what would happen if the United States defaulted on its debt, which would be a historic debt, but experts warn that it would likely lead to a global financial crisis.

Whenever tax revenue does not fully cover government programs, such as defense spending, social programs, and government salaries – which it has every year since 2001 – the government must borrow money, but is constrained by a set limit on the amount of debt which the USA has. can be incurred. According to the US Constitution, Congress must approve all borrowing, so Congress imposed the debt ceiling over a century ago to avoid all new debt. Since then, lawmakers have raised the debt ceiling many times.

“It’s the responsibility of Congress,” Eric Swanson, a professor of economics at the University of California, Irvine, tells TIME. “If you’re going to pass a law that this is the spending and this is the taxes, then whatever the difference is, it has to be debt. You have to pass the law that authorizes the debt.”

Swanson is hopeful that Congress will avoid disaster by finally reaching an agreement to raise the debt ceiling, but “they could push it really close to the deadline,” he says. “There’s a lot of disagreement these days.”

How the debt ceiling fight could affect you.

Financial markets and 401(k)s

A US default on its debt would threaten the value of bonds, equities, and the US dollar, leaving the world market already plagued with high inflation and interest, a possible recession, and multiple geopolitical crises.

In short, it would be terrible for financial markets and anyone with a 401(k) retirement account.

The Dow Jones Industrial Average fell nearly 1,000 points over the past two days as Wall Street braced for the potential shock. Firms such as JP Morgan and Goldman Sachs are already strategizing for the future.

A similar stance to raise the debt ceiling in 2011 led to a US credit rating downgrade for the first time, and huge pressure to sell stocks. The mere threat of reaching June without a resolution could scare investors into chasing international equities and foreign government bonds. A default would likely cause investors to lose confidence in the US’s ability to pay its bonds, which have historically been considered some of the safest investments.

“No one knows for sure what will happen, because it has never happened before. We’ve had these debt unrests, the treasury has taken these extraordinary measures before, and the implications have always been resolved,” says Swanson.

“So I think the big question is when these extraordinary measures end, is there anything else they can do? Is there something else up the Treasury’s sleeve that they haven’t told anyone about?” he says.

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 disruption to these programs is expected for the foreseeable future.

However, if the government defaults on its debt, that could delay Social Security and Medicare payments, along with other key programs like seniors benefits and SNAP food assistance.

To address the debt ceiling, House Republicans have begun discussing spending cuts to social programs. Some Republicans have discussed cuts to Social Security and Medicare, although the party is far from united behind that strategy. Legislators are likely to prioritize Social Security and Medicare funding — especially because they are popular with a key voting bloc — older Americans.

“If Social Security payments were delayed, the voters would go absolutely ballistic,” says Swanson. “That would be very costly politically for both parties and I think none of them want that to happen.”

Filing taxes

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 of any effects since the debt ceiling fight likely won’t happen until June or later. The tax return process should be done as usual.

The IRS usually 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, the adjustments for 2023 could be small or significant.

Government Employees

One likely outcome of how the government will keep enough funds to maintain a loan is to suspend investments in federal pensions. The Federal Employees Retirement System is considered one of the best retirement plans available, reserved for the nearly two million civilian federal employees. Pension investments should be made in full once the debt ceiling crisis is resolved.

“There’s a lot of federal employees, so that’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 from 2018-2019. Similar consequences were threatened last month when Congress stalled to pass a federal spending bill.

The $1.7 trillion spending package that Congress came up with after a long bipartisan discussion will fund the federal government until September 30, 2023, when the fiscal year ends. At that point, Congress will have to pass a new spending bill, or the government will shut down, which could leave thousands of government employees on unpaid leave, like the more than 800,000 employees deemed redundant in shutdown 2019.

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