The debt ceiling has been a top story in the news. Former Federal Reserve Chair Janet Yellen’s recent piece in the Wall Street Journal implied that, among other things, Social Security and Medicare benefits would be affected if Congress doesn’t raise the debt ceiling.
Is this true? Depends on who you ask.
What is the Debt Ceiling?
Just like any regular consumer, the U.S. government can borrow money to fund its legal obligations. These include military salaries, tax refunds, and Medicare and Social Security benefits, among other things.
The debt ceiling refers to the maximum legal amount of borrowing that the U.S. government may do (not unlike the credit limit on a credit card). First created in 1917 to regulate government spending and increase its fiscal accountability, the debt ceiling has been raised by Congress nearly 80 times since 1960 alone.
If the U.S. government’s debt hits the cap, the U.S. Treasury could run out of money and become unable to make interest payments to Treasury bond holders – or meet other obligations. This would cause the government to default and take a credit rating hit (among other financial consequences).
Will Social Security Benefits be Affected if the Debt Ceiling Isn’t Raised?
Social Security benefits are funded through payroll deductions. Even if the debt ceiling isn’t increased, the trust funds for the program would continue to receive funding and pay out retirees.
However, the dollar amount of Social Security benefit payments currently exceeds the dollar amount of Social Security payroll taxes coming into the trust fund.
To close the gap, the trust fund is tapping its holdings of U.S. Treasury bonds. If the debt ceiling isn’t raised, the trust fund, like all other creditors, would not receive the interest payments due.
This still doesn’t guarantee disaster for beneficiaries, however. A similar scenario occurred back in the mid-1990s, and Congress wound up passing a bill to temporarily exclude Social Security benefit payments from being counted as part of the U.S. national debt.
Whether or not retirees will feel a pinch from the debt-ceiling situation is still unclear. But, in the decades since the program began, there has never been a default or missed payment.
Wondering About the Impact on Your Finances?
Do you have more questions about the debt ceiling? Perhaps you’re wondering how keeping it at the same level would affect the stock market, the economy, or your portfolio.
If you’d like to review any concerns, you can do so with one of our financial advisors. Your first meeting will be at no cost to you and with no obligation. Click here to set up an appointment and review your financial plan.