How the Debt Ceiling Impacts Your Finances

If Congress doesn’t raise the debt ceiling soon, the U.S. could default, sending borrowing costs higher and possibly delaying Social Security payments.

A caution sign reads "National Debt Ceiling" against the backdrop of a stormy sky.
(Image credit: Getty Images)

One of the basics of finance is that U.S. government securities represent a “risk-free” rate of return, but unless Congress and the White House can hammer out a deal to raise the debt ceiling, we may be heading for a historic default by June 1, according to Treasury Secretary Janet Yellen. If that happens, what impact can you expect on your own finances?

First, what is the debt ceiling? Federal law caps how much national debt the U.S. Treasury can issue in the form of securities such as Treasury bills, bonds and notes to pay its bills. Once that debt limit, or debt ceiling, is reached, the U.S. government cannot borrow more until Congress raises the cap. That means that, under current rules, there soon won’t be enough cash to make upcoming interest payments on the existing debt.

This isn’t the first time we’ve been here. We had a near miss on defaulting back in 2011 that resulted in the U.S. government losing its AAA credit rating. If history is any guide, Congress and the White House will reach a last-minute deal that raises the debt ceiling. Or, if the U.S. government does technically default, the chaos that would immediately ensue should scare both parties into quickly throwing a deal together.

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But regardless of how specifically these events unfold, there are several potential impacts on our finances. Let’s go through a few of them.

Borrowing costs would rise

In the event of a default, U.S. Treasury yields might paradoxically fall, as they did in the near miss in 2011. But yields on corporate and other non-Treasury debt would likely go higher as investors dumped riskier assets. That could have a snowball effect on mortgage rates and rates on loans and credit cards. Interest rates are already higher because of the Fed’s rate hikes to try to tame inflation.

“The primary effect would be interest rates going up significantly," Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, a nonprofit research group, told NBC News. “And they’re already going up quickly and steeply. What this would do is accelerate movement toward higher interest rates.”

Possible furloughs and delayed paychecks

Though a government shutdown isn’t a given if the U.S. defaults, “nonessential” federal workers could still face furloughs, according to the nonpartisan National Conference of State Legislatures. That means workers are temporarily laid off and not receiving a paycheck. During the 2019 shutdown, over 800,000 federal workers were either furloughed or expected to continue working without pay. They were eventually compensated for back pay once the government reopened, but many had their financial lives severely impacted for weeks.

If you work in the private sector, and the company you work for depends on federal funding, that funding could be deemed nonessential. That means your company might furlough you as well.

It might make sense to have a little more cash on hand than usual, such as in an emergency fund, in order to tide you over in the event of a furlough.

Delayed Social Security and Medicare payments

Social Security is called the “third rail” of American politics, as any politician considering making changes risks the electrocution and death of their political career.

House Republicans are hoping to tie an upping of the debt ceiling to cutbacks in government spending. Those cuts are unlikely to include Social Security or Medicare, as the party is far from united in wanting to make cuts, and doing so is extremely unpopular with older Republican voters.

That said, there is a real risk that Social Security and Medicare payments could be delayed in the event of a cash crunch. Recipients would most likely be made whole once the crisis is resolved — no politician wants angry voters — but delays could still put people behind on a mortgage or other monthly bills.

Longer waits for tax refunds

If you filed for a tax extension and have not yet filed your 2022 tax return, you might end up waiting longer than usual for your tax refund when you do. The White House and Treasury have been quiet on this issue, but it is safe to assume that issuing tax refunds for extended filers won’t be a priority in the event of a default.

This won’t affect a lot of Americans, as only about 10% of taxpayers usually file for extensions. But if you’re one of that 10%, you might want to get your taxes filed quickly, before any debt-ceiling-related delays come into play.

Your 401(k) and investments

Here’s where it gets scarier. Because a U.S. government default has never happened before, no one really knows what the aftermath would look like. If the experiences of other countries are any indication, you can expect major market volatility.

In times of crisis, investors generally run to the perceived safety of cash and government bonds. But if the government whose faith and credit underpins the cash and bonds is in default, it’s not immediately clear where investors would go.

During the 2011 credit rating downgrade and near default, bond yields actually fell, as investors feared nonpayment less than they feared the slow growth or recession that might result from default. So they bought the bonds of the very entity whose dysfunction caused the mess to begin with.

All of this is hypothetical, and it is likely that the two sides will come to an agreement. But in the event that they don’t, we should be prepared for a rough ride.


Charles Lewis Sizemore, CFA
Contributing Writer,

Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas, where he specializes in dividend-focused portfolios and in building alternative allocations with minimal correlation to the stock market.