The big drama this week is in Washington as both political parties are fighting over whether the debt ceiling should be raised. At stake are all the various financial obligations of the US government: Social Security payments, government worker wages, interest payments on debt etc.
If the ceiling isn’t raised in time, then the government will have to start cutting back on some of it’s obligations.
Will social security payments be paid if United States defaults on its debt?
One of the obligations of the United States government is to pay out Social Security payments to retired people. If the government has to cut back, it is possible that Social Security payments might not be paid in August.
It’s certainly not guaranteed however that this will happen. The government has a lot of financial obligations so there are a lot of different areas where cuts could be made before Social Security.
Will Social Security payments be paid later on?
Given that the potential default, isn’t an actual economic default (ie the government isn’t bankrupt), it is very likely that even if the August Social Security payments are not mailed out on time, they will be paid later on, once the debt ceiling situation is resolved.
What is the debt ceiling?
The debt ceiling is a piece of legislation that regulates the amount of dollars of debt the United States government is allowed to borrow. Since the government budget is running a deficit, it is necessary for the government to continually borrow more money to meet its obligations.
Once the total debt equals the debt ceiling figure, the government cannot legally borrow any more money and will have to start making cuts to expenses – even if those expenses are obligations like Social Security to which the government has already committed to paying.
Why isn’t the debt ceiling being raised?
The Republican party is using this opportunity to try to get the government to reduce spending and rein in the deficit. It is likely that eventually the ceiling will be raised, but for now it is a negotiating game between the Republicans and the Democrats.
Will this be a real economic default?
If the debt ceiling is not raised in time and the US government misses some payments, this will result in a technical default. However, it should be noted that a “true” default is one where a government can’t make all their payments and does not have the economic strength to make changes in order to remove the default status and can’t borrow enough money.
For example in Greece, the economy is not big enough for the government to be able to pay off all its debts or even make all their payments. At some point, they will be in a true default. In other words, they just don’t have enough money and nobody wants to lend them any.
In the US, it is only the debt ceiling legislation that is standing in way of the US government meeting all of its obligations. This legislation has been raised many times in the past and it will likely get raised again soon – if not by August 2nd, then soon after.
The US government has plenty of money, can easily borrow more money and is not in danger of “running short”. If necessary they have a lot of power to increase taxes which can help with any budget deficit as well.