May 23, 2023 Latest on debt ceiling negotiations

House Speaker Kevin McCarthy now says he thinks President Joe Biden is trying to “disrupt” debt ceiling negotiations by bringing proposals involving Medicare and Social Security back on the table.

“The president said ‘You can’t do anything with Medicare and Social Security,’ and now he wants to bring that into the fold,” McCarthy said of a proposal that would help the government save money by expanding the number of drugs that Medicare can negotiate prices for, building on a provision in the Individual Retirement Accounts (IRA).

McCarthy also said he wanted longer spending, saying that “the country would be in better shape” if they were extended out. 

“They’re working right now in the conference room there. We’re trying to make progress,” he said. “We’re hopeful that there’s progress.”

The White House has said cuts to Social Security and Medicare are off the table in debt ceiling negotiations. But they have long telegraphed an interest in expanding Medicare drug price negotiation, which would raise additional revenue by allowing the government to negotiate the prices of more prescription drugs.

More background: The Inflation Reduction Act, which congressional Democrats passed and Biden signed into law last summer, makes several changes to Medicare that are aimed at saving senior citizens and the federal government money. The most notable is allowing Medicare to use its heft to negotiate drug prices, a longstanding Democratic goal that had previously not been allowed.

The law empowers Medicare to negotiate the prices of certain costly medications administered in doctors’ offices or purchased at the pharmacy. The Health and Human Services secretary will negotiate the prices of 10 drugs in 2026, and another 15 drugs in 2027 and again in 2028. The number rises to 20 drugs a year for 2029 and beyond. Only medications that have been on the market for several years without competition are eligible.

The White House and many Democrats, however, have been eager to expand the number of drugs subject to negotiation and bring them into negotiation sooner after they launch. This would also save the government more money, allowing lawmakers to plow the funds into other programs.

One way Biden would use the savings is to shore up a key Medicare trust fund. The proposal, unveiled just ahead of his budget plan earlier this year, calls for allowing Medicare to negotiate even more prescription drugs and raising taxes on those earning more than $400,000 annually. This would extend the solvency of Medicare’s hospital insurance trust fund, known as Part A, by 25 years or more, according to the White House.

Medicare’s trust fund will only be able to pay scheduled benefits in full until 2031, according to its trustees’ most recent annual report. At that time, Medicare, which covered 65 million senior citizens and people with disabilities in 2022, will only be able to cover 89% of total scheduled benefits. 

It’s unclear what Biden is proposing for Social Security, which provides benefits to roughly 66 million people. Though Biden has promised to defend the entitlement from any cuts proposed by Republicans, his budget made no mention of it.

CNN's Tami Luhby and Jeremy Diamond contributed to this report.

The clock is ticking faster on the nation’s debt ceiling drama. Exactly when the federal government will no longer be able to pay its bills in full and on time is not known, but it could come as soon as early June.

That doesn’t give House Republicans and the White House a lot of time to work out a deal to avoid a default. Negotiators are trying to hammer out an agreement, but multiple sticking points remain.

House Speaker Kevin McCarthy pushed his package to raise the debt ceiling by $1.5 trillion through the House in a close vote in late April. But the White House is balking at some of the provisions, including deep spending cuts and additional work requirements for those receiving public assistance.

The US hit its debt ceiling in January, triggering the Treasury Department to start taking extraordinary measures to prevent a default.

Here are some key things to know about the situation:

What is the debt ceiling? Established by Congress, the debt ceiling is the maximum amount the federal government is able to borrow to finance obligations that lawmakers and presidents have already approved – since the government runs budget deficits and the revenue it collects is not sufficient. Increasing the cap does not authorize new spending commitments.

The debt ceiling, which currently stands at $31.4 trillion, was created more than a century ago and has been modified more than 100 times since World War II.

Though it was originally designed to make it easier for the federal government to borrow, the limit has become a way for Congress to restrict the growth of borrowing – turning it into a political football in recent decades.

Still, fears of a default have prompted lawmakers to pass legislation to raise or suspend the ceiling every time, most recently in December 2021. So the US has never actually defaulted on its debt.

What happens if the US does default on its debt? Once the extraordinary measures and cash on hand are exhausted, the debt ceiling crisis would start having very real impacts.

Treasury would likely have to temporarily delay payments or default on some of its commitments, potentially affecting interest and principal payments on US debt, Social Security payments, veterans’ benefits and federal employees’ salaries, among other obligations. But it might prioritize paying interest and principal first in an attempt to minimize the fallout.

No one knows exactly how Treasury would handle the situation since it has never happened. A default would also wreak havoc on the US economy and the global financial markets, as well as shake confidence in the safety of the Treasury market and raise borrowing costs. Even the threat of one in 2011 caused the only credit rating downgrade in the nation’s history.

President Joe Biden and House Republicans have a short amount of time to prevent the US from defaulting on its debt, which would impact millions of Americans and unleash economic and fiscal chaos here and around the world.

Treasury Secretary Janet Yellen has warned the government may not be able to pay all of its bills in full and on time as soon as June 1.

Here are just three ways that Americans could be affected by debt default:

Social Security payments: Payments to about 66 million retirees, disabled workers and others receive monthly Social Security benefits could be delayed in a debt default scenario, though it’s possible Treasury could continue making on-time payments because of the entitlement program’s trust fund, said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

Almost two-thirds of beneficiaries rely on Social Security for half of their income, and for 40% of recipients, the payments constitute at least 90% of their income, according to the National Committee to Preserve Social Security and Medicare.

Other government payments could also be affected, including funding for food stamps; federal grants to states and municipalities for Medicaid, highways, education and other programs.

Federal employees and veterans benefits: More than 2 million federal civilian workers and around 1.4 million active-duty military members could see their paychecks delayed. Federal government contractors could also see a lag in payments, which could affect their ability to compensate their workers.

Also, certain veterans benefits, including disability payments and pensions for some low-income veterans and their surviving families, could be affected.

The economy: A debt default could trigger an economic downturn, which would prompt a spike in unemployment. It would come at a particularly fragile time — when the nation is already dealing with rising interest rates and stubbornly high inflation.

How much damage would be done would depend on how long the crisis continues. If the default lasts for about a week, then close to 1 million jobs would be lost, including in the financial sector, which would be hard hit by the stock market declines. Also, the unemployment rate would jump to about 5% and the economy would contract by nearly half a percent, according to Moody’s.

“It would be a body blow to the economy, and it would be a manufactured crisis,” said Bernard Yaros, an economist at Moody’s.

Republican negotiators Patrick McHenry and Garret Graves told reporters that negotiations are not going well at all and the White House needs to realize they have to agree to cut spending or no deal can be reached. It was a sober assessment that was in stark contrast to the rosier takes at the White House yesterday. 

"They have a tax crisis and they have a debt crisis," Graves said. "We're not going to be able to make this deal. We're not going to be able to move forward." The Republican claimed that Democrats "try to continue the same trajectory of overspending" and "overtaxing" while burdening the next generation with a "debt that absolutely they cannot afford and certainly didn't create."

McHenry once again said the "lack of urgency is apparent."

Asked what changed between the White House meeting yesterday and the staff meeting last night that caused him to sound so pessimistic, McHenry said: "I thought the White House meeting was reasonably productive. What we need is a team that is fully empowered by the White House to get the thing done. The White House still has this expectation that they can spend more money next year." 

When asked if Republicans would be willing to accept anything less than returning spending to full-year 2022 levels, McHenry responded: “Everybody's trying to figure out some way to shimmy this thing around. It's fundamental. You're spending less money next year than you're spending this year." 

Graves told reporters that as the negotiators deal with spending, they also have to be dealing with the reality of the other issues that have become part of these talks, including clawing back unspent Covid funds, new work requirements and other issues.

"I think that we need to address those issues first because then it gives us an idea of what type of gap we've got to address," the Republican from Louisiana said. 

A number of Republicans – even some who haven’t always backed House Speaker Kevin McCarthy – said they are standing by the speaker and are happy with how he’s negotiated up until this point. 

“I am very confident in Kevin McCarthy as our speaker,” Rep. Nancy Mace, a Republican from South Carolina, told CNN. “I don’t want speaker McCarthy’s job. That’s a very tough job … he’s got the five families to deal with and a caucus of one right here. He’s doing a great job of pulling people together.”

Asked if McCarthy’s speakership would be at risk if the speaker brought down a watered-down version of the debt ceiling bill the House already passed, Rep. Ralph Norman, a Republican from South Carolina, told CNN, “I am not going there.” 

“Kevin got to 218 for a reason and he did a good job,” Norman said. Norman has been among the loudest conservatives saying he doesn’t want McCarthy to bring anything back that isn’t the same as the bill the House already passed.

Rep. Tim Burchett, a Republican from Tennessee who actually voted against the House’s GOP debt ceiling plan, said McCarthy "is very good at deal cutting. I trust him.” 

House Majority Leader Steve Scalise said the Treasury Department appears to be “hedging” on the June 1 default date, and that more “transparency” is needed from Secretary Janet Yellen.

“What we'd like is to see more transparency on how they come to that date. But Janet Yellen herself actually left the door open to delaying that in her tweets yesterday. The comments that she sent out yesterday implied that it's June 1 or later, giving some openness to the idea that June 1 may not be the so called X-date,” he said. “It looks like they're hedging now and opening up the door to move that date back.” 

The comments echo what members of the right-flank House Freedom Caucus have been saying, suggesting that the X-date is fungible.

“We haven’t seen her work,” HFC Chair Scott Perry told CNN. “We haven’t seen any figures. We also know that the quarterlies are coming in at the end–at the middle of the month... There’s absolutely no reason to do this and we all know it.”

House Majority Whip Tom Emmer suggested members of Congress in the Senate “come back from their short vacation” and pass the House bill, which cleared the House on a party-line vote and has been deemed dead on arrival in the upper chamber.

Emmer also attempted to put the blame on Democrats and President Joe Biden if the government ultimately defaults on its debt, parroting talking points circulated by House Speaker Kevin McCarthy's office Tuesday morning about the timeline of negotiations. "The question actually remains, 'What is Joe Biden and his administration willing to give to provide solutions to the debt ceiling crisis and put this country on a better financial path?' ... It is Joe Biden and the Democrats who will have to explain to every American why they decided to default for the first time in this nation."

Scalise reaffirmed that GOP leaders believe the requirement on Congress to regularly raise the debt limit is useful for keeping a check on federal spending, despite some lawmakers questioning whether it's a constructive mechanism.

White House negotiators arrived at the Capitol moments ago to resume talks on the debt ceiling at 11 a.m. ET.

They did not comment on the status of negotiations but did acknowledge the press corps.  

White House aide Steve Ricchetti said they are “good” and “got about the same amount (of rest) you did.” 

And Office of Management and Budget Director Shalanda Young added, “you’re out early, you’re out late.” 

They refused to answer any other questions. “We are just going to work,” Ricchetti added. 

Financial experts predict the S&P 500 could dip by more than 40% if the US economy experiences a long-term debt default. 

“The real concern is whether it's going to be long and protracted. That is where you get some unprecedented downturns really. The market could tank more than 40%,” Doug Flynn, co-founder of Flynn Zito Asset Management, told CNN's Christine Romans Tuesday. 

Political risk analyst Maximilian Hess echoed Flynn’s sentiments, saying the nation’s ability to borrow in the future could be compromised if Congress doesn’t come to an agreement to raise the debt limit before the looming “X” date. 

Hess added that public trust could be forever eroded if the United States fails to pay its debts.  

“The US dollar and the US debt system is essentially an anti-fragile system,” Hess said. “The loss of trust could push others to move into other currencies, such as the Chinese yuan and renminbi. Those are things that are not in the US geopolitical and geoeconomic interests.”  

The debt — which is owned by the public, pension funds, insurance companies and, to a lesser extent, foreign governments — is considered a safe form of investment and an important backbone of the economy.

House Speaker Kevin McCarthy told Republicans during a closed-door meeting that they are still far from reaching a bipartisan agreement on the debt ceiling and asked his members to continue to remain united behind him, according to sources in the room.

But during the open mic portion of the meeting, at least one hardline member – Rep. Chip Roy of Texas – complained about Republicans seeking a compromise that waters down what they passed in the House, according to a source in the room. Roy said it’s about saving the country, not seeking a deal.

Meanwhile, Republican Study Committee chair Kevin Hern said the speaker told members they should go home to their districts if a deal isn't reached by the White House and Republican negotiators by Memorial Day weekend. Members can always be called back, but Hern told reporters that this is a deal that has to be reached between a few key people.

"The negotiations are with the speaker and his team and the White House and their team. And so the rest of us being here, just waiting around, doesn't do any good for anyone," Hern said.