Answers to the 7 big "what-ifs" of debt default
Jul 30, 2011, 9:09 a.m.
By Lauren Young
NEW YORK (Reuters) - The debt negotiations are getting down to the wire. Republican and Democratic lawmakers are scrambling to broker a deal to raise the country's $14.3 trillion debt ceiling before Tuesday, when the Treasury will no longer be able to borrow funds to meet all of its obligations. It all means the United States could face the possibility of defaulting on its debt and losing its prized triple-A credit rating.
What does that mean for consumers? Here are some answers we compiled from Reuters Money experts:
1. Should I be worried that I won't receive my Social Security benefit in August?
Perhaps not immediately. Social Security's coffers should be full enough to make the August payments. And cash flow should be positive -- the system generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.
Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren't on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.
But here's the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it's entirely possible that the administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.
Social Security advocates don't agree on what might happen.
"(Obama's statement) was a foolish bluff," says Eric Kingson, co-director of the Strengthen Social Security coalition. "There's no excuse for checks not being issued, and the White House's willingness to use the threat is symptomatic of their lack of regard for the institution. Their willingness to use it as a negotiating chip is unfortunate."
But Max Richtman, acting chief executive officer of the National Committee to Preserve Social Security and Medicare, worries that the government might decide not to fund the interest on Social Security's bonds, which would leave the program short of funds.
"We really don't know -- it's completely uncharted territory. Social Security is cash flow-positive if you count interest on the bonds. But which obligations will the government put at top of list of priorities, and who decides that? Is it paying the interest on those bonds? Will it be paying the military? There's so much uncertainty as to who gets paid, how much and when."
2. What if I just filed for benefits, or plan to file next month? Could I lose my benefits in the event of a government default?
No, but processing of your application could be delayed if the Social Security Administration is forced to lay off employees or shut down in the event of a government funding crisis.
3. Will interest rates on mortgages, car loans, student loans and credit cards rise?