The so-called debt ceiling — the amount the U.S. government can borrow to honor its spending obligations — may seem like an abstract political issue for congressional leaders to deal with, but millions of Americans could suffer very real-world financial hits if the conflict drags on.

On Thursday, the federal government reached the debt limit of $31.4 trillion, prompting U.S. Treasury Secretary Janet Yellen to invoke “extraordinary measures” that will allow the country to avoid an unprecedented default for at least the next few months. 

Because U.S. debt is considered the bedrock of the global financial system — party due to its stability — a default could undermine economies worldwide. At home, many Americans would likely see a decline in their wealth as the stock market recoiled, bringing down the value of their 401(k) plans. Social Security beneficiaries and others dependent on government programs might not get their monthly checks.

“Not raising the debt ceiling can have significant consequences on the economy and on us,” Jill Schlesinger, CBS News business analyst, said on CBS Mornings. “We could see things like delaying Social Security checks. Maybe you won’t get your tax refund on time.”

Here are three ways Americans could feel the impact of the debt ceiling crisis on their personal finances.

Stock swoon

If there’s one thing the stock market dislikes, it’s uncertainty. The longer negotiations over the debt ceiling continue in Congress, the more caution will be voiced by Wall Street about the potential for a worst-case-scenario outcome — an unprecedented default on U.S. debt.

The last time Congress had a close call with the debt limit was in 2011, when the federal debt stood at $14 trillion and Republicans agreed to a deal to raise the ceiling just days before a default. But investors were rattled even without a default, with the brinkmanship causing stocks to plunge.

“The last time we had a big impasse the stock market went down by 14% over 4 weeks,” Schlesinger noted, referring to the 2011 negotiations. 

That would add to investors’ financial woes following last year’s stock market rout, when the S&P 500 plunged more than 19%. 

Moody’s Analytics chief economist Mark Zandi in 2021 estimated that a U.S. government default would cause the stock market to plunge by one-third and erase $15 trillion in household wealth.

Surging borrowing costs

Stocks were’t the only financial asset impacted during the 2011 debt crisis. Because of the conflict, which caused the cost of borrowing to rise, debt-rating agency Standard & Poor’s downgraded U.S. debt for the first time. The lower rating undermined investor confidence in federal notes. 

A default would likely push rates even higher, said Johns Hopkins University business lecturer Kathleen Day. “The cost to borrow for homes, cars and credit cards would explode,” she said in an email. “In short, default would cause mayhem.”

Most Wall Street analysts and political pundits consider an outright default unlikely. Still, such an outcome cannot be ruled out, and would come at a time when consumers are already facing higher borrowing costs due to the Federal Reserve’s series of interest rate hikes last year. 

A debt ceiling-related increase in interest rates could price more people out of the housing market or put big-ticket items such as car purchases out of reach. 

Cuts to Social Security, Medicare 

The debt limit fight poses several risks to seniors on Social Security and Medicare. Without a breakthrough in Congress the government might not be able to send out monthly benefit checks or pay for Medicare, the health insurance program for older Americans, if it no longer has money to fulfill its obligations. 

However, not everyone agrees with this assessment. University of Texas at Austin economist James K. Galbraith, a former staff economist for the House Banking Committee and a former executive director of the Joint Economic Committee of Congress, recently wrote that Social Security, Medicare and other programs are mandated spending. That means by law the U.S. must pay for these benefits. 

“The U.S. Treasury must follow the law. Debt ceiling or no, it cannot legally default on any obligation,” Galbraith noted. 

U.S. hits its debt ceiling limit


Still, most Social Security recipients probably aren’t eager to test whether they’ll actually get their checks if the impasse continues. 

Meanwhile, House Republicans have signaled that they want spending cuts in exchange for agreeing to lift the debt ceiling. Among the ideas that have been discussed is pushing back the retirement age for claiming Social Security benefits to 70, from 66 or 67 today, and delaying the age for claiming Medicare to 67, up from 65. 

In essence, this would amount to major benefit cuts for Americans, given that they would lose out on two to three years of benefits in each program. Republicans say such cuts are necessary to keep the programs solvent. 

Experts, however, say there are plenty of other options, such as raising the payroll tax or lifting the cap on earnings that are taxed for Social Security. Currently, income over $147,000 isn’t subject to the payroll tax.

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