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What happens if the United States defaults? Here’s how the US debt default could affect you

What happens if the United States defaults?  Here’s how the US debt default could affect you


Millions of Americans who rely on federal payments to make ends meet could be negatively affected if the government is unable to pay its bills on June 1.

If that happened, economists agree that the first default in US history would be an economic disaster and could trigger a global financial crisis. Allowing the United States to default on its debts would lead to “a self-inflicted recession,” wrote Gregory Daco, chief economist at EY-Parthenon, in a note to clients this week.

This week, Treasury Secretary Janet Yellen warned Congress. In a letter to House Speaker Kevin McCarthy, R-Calif., Yellen warned that the United States may be unable to “continue to meet all government obligations” by June 1 if Congress does not increase or suspend the debt ceiling before that date.

House Speaker Kevin McCarthy, R-Calif., speaks to reporters at the Capitol in Washington, Wednesday, May 24, 2023.

(AP Photo/J. Scott Applewhite)

Yellen wrote that a default would “cause great hardship for American families.”

The federal government would have to make tough decisions, like who gets paid and when, and the consequences would be far-reaching.

Will Social Security be impacted by the debt ceiling?

Payments to 67 million Social Security recipients could be halted.

However, a 1996 law provides an escape clause that allows the Treasury Department to continue paying Social Security benefits even if there is a delay in raising the debt ceiling. “There is legal authority, and arguably it should be used to ensure benefits are delivered,” Steve Robinson, chief economist for the bipartisan Concord coalition, wrote in a recent article.

The law allows dipping into the Social Security trust fund to maintain these benefits until the debt ceiling is raised, while prohibiting these funds from being used to pay for other government programs.

There is little Americans can do to prepare for the unprecedented event of a US debt default, “since it is unclear what payment would be made, in whole or in part, as well as the moment,” Daco wrote.

Analysts say your best defense is to keep your own financial house in order. They say it will be more important than ever to have emergency savings and pay down debt.

What other elements could be affected?

Payments on other US bonds, including for Medicare and Medicaid, SNAP food assistance, veterans benefits, housing assistance and school lunch programs would also be at risk, inflicting pain on Americans across the country.

The United States’ credit rating would most likely be lowered, driving up interest rates and making it more expensive for businesses and consumers to borrow money.

Analysts say a credit market freeze could hurt the ability of US businesses to operate effectively.

Yellen also warned that a debt default would “damage our position as a global leader” as global financial markets lose faith in the United States and its ability to pay its bills. The government would not have the money to pay back buyers of its bonds and other securities, causing the US dollar to weaken and the stock market to plummet, hurting Americans’ retirement savings and other investments.

Debt limit could hurt jobs and unemployment

The damage would largely depend on the length of the standoff.

If the default lasts about a week, nearly a million jobs would be lost, the unemployment rate would climb to around 5% and the economy would contract by almost half a percent, according to financial services firm Moody’s. .

But if the standoff drags on for six weeks, Moody’s estimates that more than 7 million jobs would be lost, the jobless rate would climb above 8% and the economy would shrink more than 4%.

How did we get here?

The Biden administration and House Republicans have been deadlocked in debt talks for months.

House Republicans have passed their own bill that cuts government spending in exchange for raising the debt ceiling, but President Joe Biden has said he won’t negotiate with them until talks on the expenses would not be separated from the debt ceiling.

A recent ABC News/Washington Post poll reveals great concern about the consequences of defaulting on payment among Americans.

A large majority of survey respondents, 82%, are very or somewhat worried that a government default would hurt the economy. Only 26% of Americans take McCarthy’s position that Congress should only allow the government to pay its debts if the administration agrees to cut federal spending, while an overwhelming 65% agree with the Biden’s view that debt payment issues and federal spending should be treated separately.




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