What the debt ceiling debate means for your finances

The ongoing showdown over raising the debt limit could have serious implications for Americans' finances. The U.S. has never defaulted on its debt obligations since the establishment of the U.S. Treasury in 1789. However, experts contend that even just nearing — let alone passing — the point of default could rock Americans' retirement plans.

And that's far from the only financial impact we could see. Social Security recipients could experience delays in receiving their benefits, borrowing costs could push even higher, and unemployment could surge. Here's a closer look.

What is going on with the debt ceiling?

For weeks, congressional Republicans and the Biden administration have been unable to reach a deal to raise the debt limit, or debt ceiling. The debt limit is the cap on how much the federal government can borrow, and "because the U.S. consistently runs large annual deficits, the debt limit must regularly be addressed," The Wall Street Journal explained.

If the debt ceiling is not raised in time, the Treasury Department will reach a point where it's not able to issue more debt, which will lead to the government being unable to pay its bills on time. Treasury Secretary Janet Yellen has repeatedly warned that this deadline for default is fast approaching, perhaps as soon as June 1, if Congress fails to raise the debt limit.

Talks between congressional Republicans and President Biden are ongoing. The former would like to see cuts in federal spending before they agree to raise the debt ceiling. Biden is resistant to the idea of attaching other demands to the task of increasing the debt limit, given it does not authorize additional spending but rather ensures the U.S. can meet its existing debt obligations. 

What could the debt ceiling standoff mean for retirement plans?

As the U.S. creeps closer to a default, we are seeing "increased market volatility," Joel Dickson, the global head of advice methodology at the investment firm Vanguard, told NPR. "But whether that volatility actually manifests itself in lower or higher returns at any given point in time is really not under an investor's control and it's really, really hard to predict."

In one estimate from the think tank Third Way, "a typical worker near retirement with 401(k) savings could lose $20,000 if the U.S. were to default on its debt," NPR reported.

History also supports the assertion that debt limit standoffs don't bode well for the stock market, and thus for Americans' 401(k) plans. According to Jill Schlesinger, CBS News business analyst, during the 2011 debt limit debate, which was resolved just days before the U.S. would have defaulted, "the stock market went down by 14% over 4 weeks."

If the government were actually to default, the effects could be starker — CBS News reported that Moody's Analytics chief economist Mark Zandi predicted in 2021 that "a U.S. government default would cause the stock market to plunge by one-third and erase $15 trillion in household wealth."

Of course, since retirement accounts are intended as long-term investments, many Americans' accounts would have time to ride out the tumult and recover. But for those who are planning to retire in the near future, the debt ceiling showdown could have more immediate implications.

What about Social Security benefits?

It's likely that the estimated 66 million Americans who rely on Social Security benefits will continue receiving their payments, even if the government defaults. However, "there is a chance the checks many retirees rely on to pay the bills could be delayed or temporarily reduced should the government default on its obligations," The Wall Street Journal reported.  

Initially, the delays may not be substantial, but if the debate drags on, "they would get longer," Jason Fichtner, chief economist at the Bipartisan Policy Center, told the Journal.

What other financial damage could result from a default?

Those nearing their golden years aren't the only ones who could face financial ramifications if Congress can't strike a deal. 

Unemployment is a concern. "Don't worry about your stock portfolio, worry about your job. Because a lot of jobs are going to be lost," Zandi told NPR. "Unemployment is going to be a lot higher. Is the economy struggling already trying to avoid recession because of high inflation, high interest rates? This will certainly push us and, you know, it's going to be about layoffs. Stock portfolios will be the least of people's worries."  

A default "would likely push rates even higher," Johns Hopkins University business lecturer Kathleen Day said to CBS News. "The cost to borrow for homes, cars and credit cards would explode," said Day. "In short, default would cause mayhem."

Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week.