A Default On The U.S. Debt Would Be Far Worse Than A Government Shutdown. Here’s How.

Jennifer Shutt, Michigan Advance

A U.S. default on its debt would have a significantly broader impact on federal operations, financial markets and the global economy than recent government shutdowns that have left ordinary Americans largely untouched.

While the two have been confused frequently during debate over the debt limit, the federal government has had considerable practice with partial government shutdowns during the past decade — unlike a default on the debt, which would be uncharted territory. Treasury Secretary Janet Yellen has warned default could come as soon as June 1 without an agreement between Congress and President Joe Biden.

Government shutdowns don’t hit payments for Social Security, Medicare, or Medicaid, since Congress places those programs in the mandatory category that’s exempt from the annual government funding process and therefore predominantly exempt from funding lapses.

A default would potentially reduce payments that keep millions of households afloat, as well as payments to states and providers for health care for elderly and low-income Americans.

Government shutdowns don’t affect the financial markets that much anymore, meaning Americans’ retirement accounts typically don’t start shrinking the longer a lapse in government operations extends.

Economists expect that would be much different in an unprecedented debt default.

William Galston, Ezra K. Zilkha chair and senior fellow in governance studies at the Brookings Institution, said partial government shutdowns and a default on the debt are “almost like mirror images of each other.”

“In the first case, there’s money available but no plan to authorize and appropriate expenditures of that money. That’s when the government shuts down,” explained Galston, who served as a top domestic official in the Clinton administration.

“When you reach the debt limit, the government has already enacted programs — some of which are permanent programs, like Social Security and Medicare — but it no longer has the money to pay for them, because it can’t borrow what it needs to fill the gap between what it’s taking in and what it would have to put out,” he added.

That even includes the military. The Pentagon is bracing for a series of “severe” and unknown consequences for troops and national security should lawmakers fail to address the debt ceiling, officials told States Newsroom.

“Because there is no precedent for a default, it is difficult to know the precise impacts on specific federal programs. But what’s clear is that, without the ability for the federal government to borrow funds, there is a very real potential that any government program or payment would be halted or severely delayed,” a Pentagon spokesperson said in an emailed statement.

Here are more of the specific ways a default could roll across America:

Social Security:  If the U.S. government defaults, payments to the estimated 67 million people who are relying on Social Security this year could be delayed.

Social Security is the largest government program in terms of how many Americans are affected by it, including retired workers and dependents, people with disabilities and surviving dependents of deceased workers who count on Social Security payments as a major source of income.

A temporary disruption in payments to those who depend on Social Security income to pay their own bills could result in “impacts that would ripple through the economy at-large,” wrote Jean Ross, a senior fellow for economic policy at the liberal-leaning Center for American Progress.

At the end of 2022, roughly 48.6 million retired workers along with 2.7 million of their dependents relied on Social Security checks that averaged $1,825 a month, according to the Social Security Agency.

The U.S. spent $1.2 trillion on Social Security benefits in 2022.

“The short story here is that U.S. taxpayers owe people money because of legislation enacted in the past. We can talk about what kinds of recent legislation have pushed up federal borrowing means, but in fact some of this legislation was passed 90 years ago,” said Wendy Edelberg, director of The Hamilton Project and a senior fellow in economic studies at the liberal-leaning Brookings Institution, on a call Thursday with a group of economists.

“We owe interest to those who have lent to the U.S. by purchasing Treasury securities. We owe (money to) doctors and hospitals who have treated Medicare and Medicaid patients, and millions of people are entitled to benefits,” said Edelberg.

The Social Security Administration referred all questions about a possible default to the U.S. Treasury. Treasury did not respond to an inquiry for more information.

Veterans benefits: Veterans Administration Press Secretary Terrence Hayes said he does not have a “blueprint for what happens to the VA” if lawmakers do not strike a deal in the coming days. The Treasury Department will soon exhaust all special accounting maneuvers it has been using since January when the U.S. hit its $31.4 trillion debt ceiling.

“Because there is no precedent for a default, it is difficult to know the precise impacts on specific federal programs. But what is clear is that, without the ability for the federal government to borrow funds, there is a very real potential that any government program or payment would be halted or severely delayed,” Hayes said in an emailed statement to States Newsroom.

The Treasury makes payments totaling $25 billion on behalf of the VA each month, according to the agency.

“There are 4 million disabled veterans whose payments are scheduled for June 1, and those payments are now uncertain,” Edelberg, citing recent estimates.

A more detailed list of those payments, according to the VA’s figures, include:

$12 billion per month in benefits payments to more than 7.1 million veterans and their families.$4.8 billion per month in pay to more than 451,000 VA employees.$2.6 billion per month to community providers caring for roughly 900,000 veterans per month.$1.8 billion per month to medical and other contractors, on over 114,000 contracts.$835 million per month in pharmacy costs, for roughly 57,000 monthly payments.$3 billion per month for other costs, including to small and veteran-owned businesses.

Hayes also said there is a risk that the VA’s vendors could decide “to reduce or completely cease providing goods and services to VA if payment was uncertain.”

“As President Biden has made clear, a default would be catastrophic for the American people and for our nation’s Veterans,” he said.

Medicare and Medicaid: Government payments to physicians, skilled nursing homes, hospitals and insurance companies could lag behind if lawmakers do not raise the U.S. borrowing limit so that the government can pay its bills on time.

As of September 2022, more than 65 million Americans were enrolled in Medicare, the federal program that pays for health care for Americans age 65 and up and certain younger people with disabilities.

Medicare plans are categorized into four options — parts A, B, C and D — that range from inpatient hospital stay coverage to prescription drug benefits and various medical services in between. As of 2022, 49 million Americans relied on Medicare Part D for prescription drug coverage.

“Private practices, hospitals, and community health centers, many of which run on tight budgets and rely on timely payments for providing services, would be in the unprecedented situation of being unsure of whether they will be paid for providing care to patients covered by Medicaid and Medicare,” said Antoinette Kraus, spokesperson for the advocacy group Pennsylvania Health Access Network.

“A default would create tremendous uncertainty for doctors and patients alike. Patients who are receiving treatment for a serious health condition or who require regular care for a disability or chronic condition could find themselves unable to get the care they need,” Kraus said.

Low-income individuals, including children, disabled or pregnant persons, and seniors, can receive health care coverage under Medicaid, a joint federal-state program that provides medical and long-term care.

Of the more than 93 million Americans enrolled in some form of Medicaid, 46.2% were children, according to January data released by the Centers for Medicare and Medicaid.

“It is very likely that federal Medicaid payments to states would, along with many other obligations of the federal government, be delayed,” said Kate McEvoy, head of the National Association of Medicaid Directors. “Default is a very different scenario from an impasse in settling the federal budget, in which case payments for Medicaid and other entitlements continue to be made.”

Most nursing home residents rely on Medicaid and Medicare to cover their care, meaning a potential default is especially alarming to the industry.

“With the long term care industry already experiencing a historic workforce crisis and recovering from the pandemic, any disruption of lifeline reimbursements will result in devastating consequences for our nation’s most vulnerable individuals who need access to care. However, we remain optimistic that policymakers will come to a solution,” said a spokesperson for the American Health Care Association and National Center for Assisted Living, which identifies itself as the largest association in the U.S. representing long-term care facilities.

This story has been edited for length. REad the full story here.

Michigan Advance is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Michigan Advance maintains editorial independence. Contact Editor Susan Demas for questions: info@michiganadvance.com. Follow Michigan Advance on Facebook and Twitter.

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