What Happens If the Government Defaults?

October 23, 2015

A possible government shutdown is yesterday’s news – at least until Dec. 11, when the current continuing resolution expires.

That’s all about keeping the government running.

The new looming crisis concerns the country’s debt limit, which the Treasury Secretary says the U.S. will hit around Nov. 3.

Why is that significant?

Well, national spending exceeds revenue every year, and we have to make up the difference by borrowing – i.e., selling government bonds.

The amount America can borrow is limited by statute. So when we hit the debt limit, Congress must raise the debt limit to allow additional borrowing, or else America will default on its obligations.

There’s a general consensus among government leaders, economists, and wall street insiders that a default would be very, very bad in many, many ways.

Our national credit rating would be hurt, which would mean higher interest rates on everything from student loans to credit cards, cars and mortgages.

The stock and bond markets would take a big hit, which means your 401(k)s, IRAs, and investments would, too.

Most of all, it could very well hit currently serving and retired military and federal civilians where it hurts most – in the paycheck.

Hitting the debt limit and defaulting doesn’t mean all government payments would stop.

The country would still have money coming in…just not enough to pay all of its current obligations.

So who/what will still get paid and who/what won’t?

Most observers believe bondholders would be first in line for payment. But then some level of priority would have to be established among Social Security, Medicare, active and retired federal workers and military, government contracts, Medicaid payments to states, student loans, etc.

At that point, it’s all about the politics and the level of pain.

What payments are most vital to the country? Whose screams of pain will be thought most likely to get Congress off the dime and raise the debt limit? Someone, somewhere in the federal government is likely starting to make those assessments, just in case. 

But nobody at this point can say for sure whether current troops, retirees, veterans, survivors, or Social Security annuitants will get paid or will see their checks held up during a default period. It’s all possible.

There’s no doubt the debt limit will end up getting raised one way or another.

MOAA believes strongly it must be done before we hit the last available day.

The consequences for the country are simply too dire to be playing Russian roulette with a national default.

Please send your legislators a MOAA-suggested message urging them to get this important job done.