A default on the U.S. debt would be far worse than a government shutdown

WASHINGTON — 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 on the U.S. debt 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 on debt 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.

Federal employees

During a partial government shutdown, exempt federal employees report to work without pay, while non-exempt federal workers are sent home without pay — a situation Congress remedies once they reach a funding agreement. The exempt employees keep the government functioning.

American Federation of Government Employees Public Policy Director Jacqueline Simon said a default on the debt that lasts long enough for federal employees to miss a paycheck would be a vastly different experience than what they’ve dealt with during past shutdowns. 

The union, which represents 750,000 workers within the federal government and the District of Columbia’s local government, hasn’t sent any guidance to its members about what to do if they don’t get paid during a default. 

“This is an unprecedented situation and operations will be in uncharted waters,” Simon said. “And there’s no way to make guidance based on law.”

Public safety employees, Simon said, have worked without pay during past partial government shutdowns with a promise they’d get paid eventually when a bipartisan agreement was struck — something she expects they would do after a debt default is resolved. 

“In previous shutdowns, public safety employees have been called into work, expected to show up to work with the promise that they’d get paid eventually when the appropriations bills pass,” Simon said.

“I assume there’d be a similar kind of situation where you don’t even need appropriations bills to pass, you just need the default to end,” she said, later adding that because the United States has never defaulted, “nobody really knows.”

Substance use prevention and recovery, mental health:

The U.S. is facing a staggering drug overdose epidemic, and many states and local governments rely on federal grants for prevention and treatment efforts.

Drug overdose rates in the U.S. have risen fivefold in the past two decades, according to a Centers for Disease Control and Prevention study published in December. In 2021

the CDC tracked a record 107,622 overdose deaths — 71,238 of them were due to man-made, illegal fentanyl substances, an issue in the crosshairs of both Democrats and Republicans.

Illicit fentanyl ending up in other drugs — for example, counterfeit prescription pills, cocaine and heroin — has been the target of federal agencies and the subject of multiple congressional hearings and roundtables.

The Substance Abuse and Mental Health Services Administration, or SAMHSA, administers two major grant programs: one for substance abuse prevention and treatment services, the other for mental health services. 

The agency, housed under the U.S. Department of Health and Human Services, devoted 65% of its 5.89 billion program budget in 2020 to treatment programs.

Facilities that receive federal dollars could be in limbo if the government defaults.

“It’s a little hard to tell. I don’t know if the publicly funded facilities would stop accepting patients or if they would assume that it’s going to be paid at a later date. And, you know, it’s just so unclear and up in the air because this is such an unusual situation,” said Mark Dunn, director of public policy for the National Association of Addiction Treatment Providers.

SAMHSA did not respond to requests for comment.

National defense

Defense Secretary Lloyd Austin told Senate appropriators on May 11 that a potential default brings uncertainty for the over 3.4 million military personnel and the U.S. military’s global presence and commitments.

“There is substantial risk to our reputation,” Austin testified. “Again, we are viewed as being a source of stability globally. And we always pay our debts, and there’s just a number of things that we’re working with allies and partners on and that would come into question as to whether or not we’ll be able to execute programs. 

“But most importantly, this will affect the livelihood of our troops and our civilians. We won’t be able to pay people like we should and, and I think that’s something that China and everybody else can exploit,” he continued.

USDA food assistance

One in four Americans, from infants to seniors, participate in one of the 15 food and nutrition assistance programs offered by the U.S. Department of Agriculture. 

Many of those programs offer monthly assistance, such as the Supplemental Nutrition Assistance Program, known as SNAP, and the Special Supplemental Nutrition Program for Women, Infants, and Children, referred to as WIC.

If the government defaults, monthly payments to more than 42.5 million Americans on SNAP, and monthly payments to the more than 6 million families on WIC, could be delayed. 

The recent bill that House Republicans barely passed that would temporarily raise the U.S. borrowing limit also tightened access to food and assistance for low-income Americans by expediting the effective dates for safety net work requirements — from 2025 to 2024 for SNAP.

SNAP already has two sets of work requirements.

Another program that could be affected if there are delays in payments is the Food Distribution Program on Indian Reservations, where each month USDA sends packed foods to about 84,000 individuals on Native American reservations.

A USDA spokesperson said in an email that the exact impact of certain federal programs can depend on uncertain factors.

“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,” the spokesperson said.

School lunches, which USDA provides for more than 30 million children each day, could also be affected.

Other child nutrition programs that could get wrapped up in payment delays include the National School Lunch Program, School Breakfast Program, Child and Adult Care Food Program, Summer Food Service Program and the Special Milk Program.

Lisa Davis, the senior vice president of the No Kid Hungry campaign at Share Our Strength, said in an email that a default would have a devastating impact on families and individuals who rely on food assistance programs such as SNAP. Share Our Strength is a national organization that aims to end child hunger and poverty in the U.S.

“Not only is SNAP being used as a bargaining chip in these negotiations, but the people who benefit from this critical program will be some of the individuals hit hardest if a government default becomes reality,” she said.

Farmers could also run into problems if there are delays to any USDA payments, ranging from crop insurance payouts to new loans for expanding farming operations.

USDA announced in early May an additional $130 million in automatic financial assistance for qualifying farm loan program borrowers who are facing financial risk. For those who qualify, they will receive automatic payments from the Farm Service Agency, but those funds could be delayed if the country were to default on its debt.

Homeland security

If the U.S. government were to default, it would mean the U.S. Department of Homeland Security would have to delay payments to various private contractors such as those that run Immigration and Customs Enforcement detention facilities, and even delays in grants to nonprofits that provide aid and transportation to migrants seeking asylum.  

It would also mean that the more than 50,000 Transportation Security Administration employees across more than 440 airports could have their paychecks delayed.

The Department of Homeland Security did not respond to States Newsroom’s request for comment.

Court proceedings before immigration judges would also be delayed. There is already a more than 1.6 million backlog of cases.

The Department of Justice, which handles immigration court proceedings, did not respond to State Newsroom’s request for comment.

Highways and transit

The Highway Trust Fund, which sends money from federal gas and diesel taxes to states for road and transit maintenance and construction, could also see a rare disruption in outlays.

On paper, the trust fund has a healthy balance — it was $94.2 billion at the beginning of April.

But if Treasury doesn’t have the money to actually spend, that could mean payments from the trust fund would be delayed, said Jeff Davis, a transportation spending expert and senior fellow at the Eno Center for Transportation, a nonpartisan think tank.

After making debt service payments, there’s no clear indication what already-obligated spending would take priority, putting highway and transit funds on par with scores of other programs, Davis said, cautioning that his analysis was provisional because it was not backed by precedent or Treasury Department guidance.

“I think they’re going to have to wait in line with everybody else,” Davis said of Highway Trust Fund payments if the debt limit is hit. “Just because there’s theoretically that much money in the trust fund doesn’t make a difference if there’s actually no dollars in the Treasury.”

Conservation

Conservation advocates won a huge legislative victory in 2020 when Congress passed the Great American Outdoors Act that provided $900 million annually for the Land and Water Conservation Fund and removed the fund from the annual appropriations process by classifying it as mandatory spending.

Prior to 2020, the fund, which is filled by fees on offshore oil and gas development and used to protect national parks and forests, wildlife refuges, coasts and other natural areas and provides matching grants for state and local recreation projects, was subject to periodic fights over its funding levels and — at times — its continued existence. 

Proponents considered the 2020 law approving the fund in perpetuity a once-in-a-generation victory. Montana Republican U.S. Sen. Steve Daines, a leading proponent of the measure, thanked then-President Donald Trump “for signing the most important piece of conservation legislation in over 50 years.”

But a default could reintroduce the uncertainty proponents thought they’d erased with the 2020 law.

“A default would be an economic disaster across the board — even in ways we don’t know yet,” U.S. House Natural Resources ranking member Raúl Grijalva, an Arizona Democrat, said in a written statement. “The Treasury would likely have to make tough calls about extraordinary measures to redirect mandatory funds to pay our debt, so even widely beloved programs like the Land and Water Conservation Fund could be at-risk.”

A spokeswoman for the U.S. Interior Department, which manages the fund, declined to comment on what would happen in a potential default.

“We can’t speculate on unforeseen circumstances,” the spokeswoman, Melissa Schwartz, wrote in an email.

Similarly, Daines spokeswoman Rachel Dumke declined to entertain the possibility of default

“Senator Daines does not see a default on the national debt as an option and he is calling on President Biden to make a deal with Speaker McCarthy as soon as possible to avoid a crisis,” she wrote in an email.

Housing assistance

A spokesperson for the U.S. Department of Housing and Urban Development said in an email 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.”

HUD handles rental assistance, housing vouchers, claims of unfair housing practices, obtaining affordable loans and public housing among other things.

“Some of HUD’s key agency programs and initiatives, which play a vital role for Americans across the country, could be halted or severely delayed … which would impact our nation’s most vulnerable communities,” the spokesperson said.

Earlier this year, the agency announced more than 2,400 grants totaling $5.6 billion in funding for 1,200 communities across the U.S. for community development, homeless assistance and affordable housing. Payments to those programs could be delayed if the government defaults.