How a debt default could affect you (2024)

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In a little over a week, the United States could find itself without enough funds to pay its bills, and lawmakers are still looking for the keys to a debt ceiling deal.

Let’s walk through what the debt ceiling is, why it was created, and who could be affected first if the U.S. defaults on its bills.

What is the debt ceiling again?

The U.S. needs to borrow money to pay its bills, and the debt limit is a hard ceiling (hence “debt ceiling”) for how much the federal government can borrow at any time.

• For most of its history, the U.S. has spent more money than it has taken in. As a result, it borrows large sums of money to pay its bills. The sum of all of that unpaid borrowing is our national debt.
• The national debt is currently more than $31 trillion. You can see what it is, to the penny, here.

Why do we have a debt ceiling?

Congress created this system more than a century ago to try to allow for more borrowing in a time of war.

• Lawmakers approved the first debt ceiling in 1917 to allow President Woodrow Wilson to spend the money needed for World War I — without waiting for lawmakers to act.
• Congress at the time set a borrowing limit of $11.5 billion. Any increase required congressional approval.
• Since World War II, the debt ceiling has been modified more than 100 times, according to the Congressional Research Service.
• The latest change occurred in 2021, when the debt ceiling was raised to $31.38 trillion.

When do we hit the debt ceiling?

This is the trillion-dollar question at the moment.

Technically, the U.S. edged right up to the debt ceiling months ago — in January. Since then the Treasury Department has been using accounting maneuvers, known as “extraordinary measures,” to keep the federal government afloat. But those measures are about to run out.

Treasury Secretary Janet Yellen has said a default could happen as early as June 1, if Congress and the president don’t act. Today, the Bipartisan Policy Center placed the most likely “X-date” as sometime between June 2 and June 13.

Now let’s talk turkey. Those June 1 and June 2 estimates are “worst case.” There is a possible cushion, and potential mechanisms the federal government has, to extend that a few days. (Think: not paying some bills that can wait.)

But the exact timeline is unclear. And as you’ll see below, the risk is monumental if you cut it too close.

Well, what happens if the U.S. defaults?

Watch the segment in the player above.

This is a very common question, from readers and — truth be told — among the nation’s economic experts.

The short answer is: It depends on how long any default lasts and what it looks like, but in general if the U.S. cannot pay its bills, that crunch will lead to economic ripple effects across the country and globe.

If this lasts beyond a day or two, say a weekend, the consequences will be far-reaching. It will be “catastrophic,” a word Yellen has used to describe a protracted default.

But we need to stress that while there have been moments in U.S. history when the nation missed debt payments, this still would be uncharted waters. It is not clear exactly what a default would look like, which bills would get paid first or even exactly who would decide. (Also note: That uncertainty is already having an effect now.)

What does this mean for you?

This is really the key question. And there are really two crises here that could affect you.

First is the immediate crisis if the U.S. defaults. For average Americans, there are a number of serious potential effects. Quickly, Wall Street and global markets could drop or plunge. That could affect retirement savings, 401K plans, college savings, anything tucked away and invested.

Certain federal programs – Social Security, Medicare, Medicaid, veteran benefits, SNAP benefits, among others – could be among the first affected by a default, according to an analysis from the Bipartisan Policy Center.

Also at risk? If Yellen’s current timing estimate holds:

• $12 billion in military and civilian retirement benefits paid on June 1.
• $1 billion in tax refunds scheduled to go out June 7.
• $4 billion in federal salaries, payable on June 9.

The dollar is a global reserve currency and U.S. bonds are seen as one of the most stable investments on the planet. So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive.

Finally, there is a real concern about the economy — that a default could spark a recession. That could then mean fewer jobs and harder times for businesses, especially small businesses.

Watch the segment in the player above.

The other crisis involved here is longer term and slow moving. If the debt is allowed to grow at current rates, it will be unsustainable.

In 30 years, just the interest on U.S. debt would be so unsustainable that U.S. taxpayers would be paying 50 percent of their taxes just for interest. It would lead to dramatic cuts in spending along with increases in taxes to make up the difference.

As part of that, without changes, as soon as 2035, Social Security benefits could face an immediate 23-percent cut in benefits. And that cut would grow.

What about the 14th Amendment? Is this an option to address the debt ceiling crisis?

Bob Davis of Portland, Oregon asked: “Can the 14th be used to stop the debt crisis?”

The 14th Amendment to the U.S. Constitution, passed following the Civil War, is well-known as the provision granting citizenship to formerly enslaved people. But it also includes a section declaring, “The validity of the public debt of the United States, authorized by law … shall not be questioned.”

President Joe Biden has said he believes this may give him the authority to unilaterally lift and possibly override the debt ceiling altogether. But he also said he is leery of the idea.

Among the downsides is that using the 14th Amendment this way is untested and deeply debated. The public debt clause was originally written to verify that the U.S. debt was valid and Confederate debt was not. More pragmatically, Biden expects this kind of use would be challenged in court, and those challenges could delay its use past the debt ceiling deadline.

Finally, this would be politically divisive. House Speaker Kevin McCarthy and other Republicans have been clear in their opposition to this deployment of the 14th Amendment.