NEW YORK -- As the Treasury Department prepares to hit the swiftly-approaching debt limit with no agreement to lift it in sight, fears are growing that the government might opt to skip the next round of Social Security payments.
Experts warn that the program is such a vital source of support for so many low-income and elderly Americans that even one delayed payment could trigger a domino effect, sending millions of households into delinquency on a broad range of bills.
"What we are talking about here," said Joan Entmacher, vice president for family economic security at the National Women's Law Center, "is not the financial markets -- not that they are not important -- but the very ability of millions of Americans to buy food, pay their utility bills, their rent or mortgage and to generally function."
If Social Security payments don't come, Entmacher said, "there are a whole series of very serious, deeply frightening consequences that could, and very likely would, follow."
There are about 54.8 million Americans who receive some form of Social Security benefits each month, according to government data (see Table 2). Most payments are made to retirees, disabled individuals and certain dependent children and adults. The first of next month's payments are due Aug. 3. Another 15 million Americans are also due veterans' benefits, federal or postal employee retirement benefits and other payments beginning on that date.
For a substantial share of the people who receive Social Security benefits, that income is essential. About 40 percent of all unmarried individuals who receive social security benefits rely on the program for at least 90 percent of their income, the Social Security Administration's inspector general found in a November 2010 report. About 90 percent of women over age 80 derive nearly all of their income from Social Security benefits.
Losing that income could prove disastrous. Households that don't pay utility bills eventually face shut off. Banks can charge account overdraft fees. And creditors also generally charge late fees for overdue payments. Credit card companies can raise a customer's interest rate due to overdue bills.
"Suddenly the credit card with 19 percent interest goes up to an unmanageable 30 percent interest," said Entmacher. "I don't think it requires too much imagination to consider what happens to American households from there."
Until now, Social Security income has not only been essential for many households but also very reliable. About 88 percent of all Social Security recipients receive their benefits via direct deposit, according to the Social Security Administration. That means government funds begin to appear in more than 47 million recipients' bank accounts or on dedicated debit cards around the third day of each month. For some recipients, the expectation of regular payment has shaped their financial lives for more than a decade.
"Millions of people arrange their household budgets around those payments," said Entmacher. "They know that if they write a check for their rent or their mortgage and put it in the mail on August 1 or 2 then by the time the check clears their Social Security will have arrived. So, they put that check in the mail and make that payment on time."
Others have set up automatic bill arrangements that pay out just before or after the payment date. If payments don't go out Aug. 4, millions of people might overdraw their bank accounts, Entmacher said.
The average bank charges an average of $30 to $35 per overdraft, said Kathleen Day, a spokeswoman with the Center for Responsible Lending.
"We think that it would be more than unfortunate if banks choose to take advantage of people who are financially vulnerable and use this potential situation to generate overdraft fees," said Day. "Of course, we don't know what will happen yet. No one does."
Many of the nation's largest banks have, so far, shied away from public statements about the way that overdrafts would be handled if the government fails to pay Social Security benefits in the event of default.
On Thursday, Bank of America, declined to comment on what its spokesperson described as a hypothetical situation. A bank spokesperson also declined to comment on conversations the bank has had with federal regulators.
The federal agency that regulates banks has instructed financial institutions to use judgment in assessing any overdraft fees that may result from social security benefit delays, the New York Times reported Thursday. The Treasury Department declined to answer questions Thursday about what, if any, limits would be imposed on overdraft fees if social security payments are simply delayed to avoid default.
In a statement emailed to The Huffington Post, the Treasury Department indicated that it is making plans in the event that a debt-ceiling compromise is not reached in Congress before Aug. 2.:
While only Congress has the ability to ensure the government pays all of its bills, Treasury will provide more information as we get closer to Aug. 2 regarding how the government would operate without new borrowing authority if the debt limit is not increased.
There is some debate about exactly how much money the United States would have on hand to pay interest on its debts if a debt-ceiling compromise is not reached in the next few days. According to the Treasury, about $90 billion in debt matures on Aug. 4 and the government must pay more than $30 billion in interest on Aug. 15., Bloomberg reported.
"Our view right now," said Nariman Behravesh, chief economist at IHS, an economic forecasting and market analysis company, "is that the chances of default are very low mostly because the kind of financial meltdown that could occur as a result of an actual default is almost unimaginable."
Without an increase in the debt limit, the Treasury Department will have to make what could be a series of economically disruptive moves to prevent default, Behravesh said. At the least disruptive end of the scale would be a decision to furlough a large number of federal workers for a short period of time until the debt ceiling could be raised, Behravesh said. The government could also delay payments to federal contractors.
"Those are not ideal choices but they could probably be managed for a short period of time," said Behravesh. "If a compromise is reached in a day or two, they're no biggie."
Near the other end of that scale would be a delay in payments due to states for things such as roads, schools amd foster care subsidies. Skipping those payments could lead to additional public worker furloughs and a hold on state and local government spending.
Then there are the millions of social security payments due Aug. 3. President Obama told CBS News earlier this month that he could not promise that Social Security benefits would be issued if a debt-ceiling compromise is not reached.
It is possible that that furloughing government workers and delaying other payments would not raise enough cash to pay interest on the national debt, Behravesh said. In that case, social security benefits would have to be held.
"We think they would try to avoid this at all costs because it would be effectively hari-kari , and by that I do mean political suicide," Behravesh said. "But if that happens, there is no question that the consequences would, almost immediately, be enormous and painful for a lot of households."
Clarification:An earlier version of this article suggested all Social Security benefits payments would be paid Aug. 3. Beneficiaries can receive payments over the course of the month. That process next begins Aug. 3