What Happens At Social Security -- And Elsewhere -- If The Debt Ceiling Is Not Raised?

Most people must believe that if the debt ceiling is not raised that the U.S. will default on its bonds. That is not at all how things are going to go down if the debt ceiling is not raised. There is a constitutional prohibition on the U.S. government defaulting on its bonds. No, it is other U.S. obligations -- like Social Security -- that will be defaulted on. From the Bipartisan Policy Center:

An analysis released today by the Bipartisan Policy Center (BPC) confirms that at some point in early August, unless the debt ceiling is raised, the federal government will be unable to meet all of its spending obligations. BPC’s analysis also shows that, after that date, federal spending would be reduced by as much as 44% for the remainder of August, as the Treasury prioritizes payments to remain under the debt limit. ...

Under a system of prioritization, to pick one illustration, Treasury could exhaust all inflows for the month of August by paying only six major items: interest on our existing debt, Medicare, Medicaid, Social Security, unemployment insurance and defense contracts. Without cutting from these items, there would be no money to fund entire U.S. departments, such as Justice, Labor, and Commerce. There would also not be funds to pay for veterans’ benefits, IRS refunds, military active duty pay, federal salaries and benefits, special education programs, Pell Grants for college students or food and rent payments for the poor. ...

Moreover, BPC’s research shows that the day-to-day outlook would be even more harrowing. For example, if the cash shortage begins on August 3, as projected by Treasury, the government could find itself unable to make a $23 billion Social Security payment that has to go out that day.

The bottom line is simple. If the debt ceiling is not raised by August 3, Social Security payments due to be made on that date will not be made or, at least, not made in full. They may be paid later. Social Security payments due thereafter may also be delayed or not paid in full. Paying Social Security benefits, even on a delayed basis, will make it impossible to pay many other federal obligations. The President will be forced to make impossible decisions between paying Social Security benefits, soldiers in the field, Department of Defense vendors, Medicare, Medicaid,  VA benefits, Food Stamps, the costs of VA hospitals, air traffic controllers, keeping the CIA running, grants from the Department of Education that keep schools and colleges open, etc. There would be no good choices. No one would escape the pain, including bond holders since even without a bond default, bond prices would plummet. And, in case what I am describing does not sound serious enough, there would also be an enormous risk that the U.S. economy would be plunged into a 1930s style depression.