Debt ceiling standoff may delay Social Security, Medicare payments

The U.S. may be weeks away from being unable to pay its bills — an event that, should it come to pass, would likely be accompanied by broad and painful financial consequences for American households.

Among the ramifications of a debt ceiling standoff, any payment issued by the federal government — like Social Security, Medicare, tax refunds, military paychecks and ample others — may be delayed.

As an illustration, if the U.S. has just 80 or 90 cents for every dollar it owes, it will be forced to defer certain payments.

“Someone is getting shortchanged,” said Michael Pugliese, senior economist at Wells Fargo Economics.

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There are many unknowns: the length of any delay or if the government would prioritize certain payments, for example. The U.S. has never been in this situation and the government hasn’t issued a public road map outlining its response, meaning there’s a certain amount of guesswork involved.

“We’re looking at some sort of contagion effect,” said Rachel Snyderman, senior associate director of economic policy at the Bipartisan Policy Center, a think tank. “The degree of contagion is unknown.”

The U.S. is in this situation due to a political standoff tied to the debt ceiling, also known as the debt limit. This ceiling is the amount of money the U.S. is authorized to borrow to pay its bills.

The nation runs a budget deficit, meaning it spends more than it makes in revenue. It must therefore borrow money to meet its obligations.

Congress periodically raises or temporarily suspends the debt ceiling to avoid the other scenario: a default on the national debt and other federal payments.  

Here’s the current problem: The country hit the debt ceiling — currently $31.4 trillion — in January. Since then, the U.S. Department of the Treasury has been able to shift money around and delay the so-called “X-date,” the day on which the federal government can no longer pay its bills in full.

That date may be as soon as June 1, Treasury Secretary Janet Yellen said last week.

But a political impasse between Democrats and Republicans means a deal has, so far, been elusive.

If the U.S. reaches the X-date without a debt ceiling deal, it would be the first time in U.S. history that the federal government has intentionally reneged on its financial promises.

This is where the hypotheticals around “who gets paid and when” start to come into play. Some clues and educated guesswork can help to answer that question.

It’s likely that the government would first pay investors and financial entities holding U.S. Treasury bonds. These payments to bondholders would be for principal and interest.

Federal Reserve officials alluded to the likelihood of prioritizing bondholders in a 2011 meeting that followed an earlier debt ceiling episode.

Not doing so would trigger a “technical default.” In other words, the U.S. would default on its debt payments.

While missing any federal payment would likely sow chaos, the scenario of missed bond payments “is what would really trigger financial Armageddon,” Wells Fargo’s Pugliese said.

U.S. Treasury bonds are the foundation of the whole global capital structure, he said.

The market for Treasury bonds — worth about $24 trillion — is the “largest and deepest bond market in the world,” according to a Wells Fargo research note.

They’re held by all sorts of global investors, like U.S. and foreign banks, insurers, retirement funds, mutual and exchange-traded funds, sovereign wealth funds and individuals.

Investors view them as a risk-free asset. Holding short-term Treasurys is theoretically “the one super safe thing you can do” with your money, Pugliese said.

“What does the world look like…