US Speaker of the House Kevin McCarthy, Republican, speaks to the media about debt negotiations on Capitol Hill in Washington, May 24, 2023.
If there is no deal between Democrats and Republicans on the debt, what are the spending cuts? That’s the dilemma facing the Treasury Department, and social spending, the main item in the federal budget, could be the first victim.
In 2022, Social Security, where pensions come from, and the Department of Health, through the Medicaid and Medicare programs, will jointly represent about $2.8 trillion in a total budget of $6.27 trillion. It accounts for about 45% of federal state expenditure.
If funds are short due to an inability to issue debt, it may have accounting maneuvers to resort to: delaying some payments is one of the Treasury’s approaches, The Washington Post reported.
This will only be a temporary solution.
If political disagreement persists, the government should prioritize paying off the public debt to try to avoid default.
The Secretary of the Treasury, Janet Yellen, has already stressed that without more ability to issue debt, there won’t be enough money for everything.
For the most vulnerable Americans, retired, sick or poor, the consequences could be significant: pension arrears, health centers without attention capacity …
According to the Department of Health, Medicare will pick up 26% of hospital costs in 2021. If the flow of money is interrupted, some health centers will not be able to recover.
– Sale of properties –
Other solutions: Social Security, which pays pensions, and the Department of Health, could sell assets in the financial markets.
There are two sources of funding for these distributions: money from the federal budget – more than $1 trillion in 2022 – and, like most pension funds, dividends or interest generated from their investments.
But the law requires them to invest only in public assets that generate returns, which limits the potential primarily for Treasury bonds, whose value could collapse in the event of a US default.
Thus the health and pension agencies would effectively lose these funding options.
Social Security has some $2.8 trillion in assets and is the first holder of Treasury bonds in the world, ahead of the US Armed Forces pension system with $1.36 trillion. At current bond prices, this would be two years of financing.
The Department of Health has $430,000 million, about three or four months of funding at current prices.
If this option works, it may buy the government time. But “Republicans could push the president in this direction and then rebuke him for not controlling spending,” said Cornell law professor Robert Hockett.
