Social Security, Medicare, and Stocks: How a Debt Ceiling Crisis Can Affect You

If the White House and House Republicans fail to raise the debt ceiling and the US defaults on its national debt for the first time ever, the economic ramifications for Americans will be far-reaching and long-lasting.

Social Security checks could be held up, government salaries and contracts could be frozen, Medicare reimbursements to doctors and hospitals could be suspended, stock and bond markets will almost certainly take a nosedive, and funding levels for basic private purchases could skyrocket.

The good news is that, aside from the weapon against the temple of the US economy, the underlying health looks pretty good. Employment levels have refused to budge from near record highs and American consumers continue to spend on things they want to buy.

Wage increases during the pandemic have largely been swallowed up by inflation, but high turnover in the labor market has given workers a measure of freedom and independence from their employers. Corporate profits are still well above historical levels.

Inflation is also falling quite steadily: Egg prices fell to an average of $3.27 in April, and the price of gasoline is down to $3.57 a gallon from $4.60 a year ago, after a record high of $5.01 last April.

But that solid bill of health could be traded for a morbid prognosis in the event of a default, especially if the economy slides into recession in the second half of the year.

Here’s how to prepare household finances in the event of a first-ever US default.

Save some extra cash in case benefit checks don’t arrive

If you’re one of the 67 million Americans who get a Social Security check each month or one of the 86 million Americans enrolled in Medicaid, a government default could mean that a payment you’re expecting doesn’t arrive.

Personal finance experts often recommend keeping a buffer fund in case of an emergency, but extra cash on hand can be especially helpful if a check for groceries or medicine doesn’t arrive in the mail.

A buffer fund should contain a few hundred dollars if possible, experts say.

“I don’t know if it will be the first day [after default] or the first week or the first month, but at some point, [the government] will not have the money to pay Social Security benefits. Nor will they have the money to pay doctors and hospitals for Medicare reimbursement,” Howard Gleckman, a tax and federal revenue expert with the Urban-Brookings Tax Policy Center, said in an interview.

“It’s the federal government, so people don’t usually think of it that way, but when you’re writing checks, there has to be money to pay the bill. If not, that check will literally bounce,” he said.

People who work with retirees, who make up the vast majority of people who enjoy Social Security, say there’s a lot of concern right now about checks that may not come through.

“There’s a lot of concern about this,” David Briseño, who manages retirement benefits at La Casa Family Health Center in Clovis and Portales, New Mexico, told The Hill in an interview.

“These seniors already have a fixed income, they are already struggling. For many of them, there is a problem of lack of food in their homes. Having to make decisions about whether they’re going to pay the electric bill or whether they’re going to get food or get prescription drugs — there are those concerns,” he said.

“If this funding is cut, it will get worse,” he added.

Don’t worry too much about the stock market

From the dotcom crash of the early 2000s to the global financial crisis of 2008, the stock market has a history of recovering from financial shocks. More recently, in the wake of the economic shutdowns caused by the coronavirus pandemic, equities roared back into one of the most successful recovery periods ever.

Unless you’re a technical trader or a professional investor who speculates on short-term fluctuations in financial markets, it’s best not to try to profit from volatility, experts say.

Hold on to your wealth, keep your investments diversified across different sectors and wait for things to calm down.

“We see this debt ceiling debate happening every few years, and it always results in the same drama — the same volatility,” Principal Asset Management analyst Seema Shaw wrote in a note Friday.

“Investors would be best served with a broad toolkit that is well diversified across strategies, products and sectors,” Shaw wrote.

Think carefully about big purchases

Consumers may now wonder if now is the right time to make a major purchase, such as a car or a house.

In general, every household is in the best position to assess where their finances stand, Mark Hamrick, senior economic analyst at Bankrate, told The Hill.

“At the moment they see a high risk that things could go wrong, but this can be resolved quickly. And so, if someone has a big sense of concern, I’d just say, consider putting off making a decision, Hamrick said.

Hamrick added that he would also advise consumers not to lose sleep over the issue as all parties are working to resolve the issue.

“And if that gets resolved, that becomes a major source of uncertainty that gets eradicated. And then we just go back to the other sources of uncertainty that we’ve been dealing with,” he said.

Secure a lower mortgage rate

Housing is already unaffordable for many amid persistently high prices and stubborn mortgage interest rates.

A default could freeze activity in the housing market as mortgage rates would rise past last year’s peak.

This would effectively exclude both buyers and sellers from the market. Sellers may be reluctant to give up their low pandemic-era mortgage rates, while expected rates would keep buyers on the sidelines.

In the meantime, buyers might want to consider fixing a rate sooner rather than later, as a prolonged battle against the debt ceiling, without default, could lead to a fall in mortgage rates, Redfin chief economist Daryl Fairweather told The Hill.

“This is because a long debt struggle would increase the risk of a recession. In an actual default, interest rates would likely rise,” she said. “This is because investors would question the ability of the US government and banks to repay their debt.”

“Given that interest rates can fall and then rise, I would advise borrowers to lock in an interest rate now but have an option down so that you can take advantage of a scenario where rates fall but are protected from rising interest,” she concluded.

Manage expenses and credit

Economic uncertainty can lead consumers to save a little more each week and evaluate their own debt.

One way to manage personal cash flows for the less savvy consumer could be through a high-interest savings account with an interest rate of 3 percent or better, Bankrate’s Hamrick said.

These are highly liquid and many of them do not require minimum amounts.

“This is one of the consequences, and perhaps a rare one, that is beneficial in the high and rising interest rate environment,” he said.

“We have been really hammering on the table for a while that people pay attention to high rates when it comes to borrowing. But they should also pay attention to high rates with respect to return on savings and that’s something that’s having a moment right now,” Hamrick said.

A debt crisis could tighten credit conditions and lead to higher rates, fewer options and more expensive loans for people on the margin, Hamrick said.

But for those with credit card debt, it’s always a good idea to pay off debt, though it can be helpful for consumers to balance credit debt with other savings goals.

“Paying off the most expensive debt is the most optimal, because that is of course a higher cost. Credit card debt would be at the top of that hierarchy,” he continued. “It has to be balanced against the right, sometimes conflicting goals, which have to coexist, so that’s saving for emergencies and saving for retirement.”