The Impact of the Government Shutdown on Federal Benefits

by on Oct 14, 2013

In addition to putting over 800,000 people temporarily out of work, the federal government shutdown has substantial implications for individuals and families reliant upon federal benefits. In early-November, the government is scheduled to pay out over $60 billion dollars in social security and military benefits, and these payments are in jeopardy of being delayed or suspended if the shutdown continues. Below, we examine the potential impact of a prolonged government shutdown on key federal benefits.

Wells Fargo and Merrill Lynch were quick to notify their retirement plan participants that the shutdown will not affect the normal servicing of accounts. With that being said the shutdown is disturbing government employee’s retirement plans. These accounts work like 401(k) plans, meaning they are funded by payroll deductions. Federal employees are not being paid during the shutdown so their retirement accounts will remain static. Additionally, current employees cannot borrow from their accounts unless they are granted a special circumstance such as a financial hardship. Fortunately, retired federal employees will still receive pension payments.

Social Security
Social security benefits are ongoing, as 58 million people are still receiving monthly payments despite the shutdown. The Social Security Administration is accepting applications as well. However the cost of living adjustment, which increases benefits payments based on inflation, cannot be made during the shutdown. Although the adjustments will not be applied to payments until January, the uncertainty is nonetheless an unnecessary source of stress for retirees.

Although Social Security benefits are paid during a government shutdown, these benefits are not paid in an economic shutdown, which is rapidly approaching unless the two parties can agree to raise the government’s borrowing limit. A new report from AARP sheds some light on the impact that social security has on the US economy; every $1 paid out by Social Security generates, in turn, about $2 of total output for the economy — or approximately $1.4 trillion in 2012.

The Department of Defense announced last week they would not be able to pay military death benefits during the shutdown. These payments are generally paid to the families of fallen soldiers for funeral costs and other expenses. On October 9th, Fisher House Foundation (a private charity), agreed to cover the military death benefits. On October 10th, however, Obama signed a bill that will restore death benefits.

If the shutdown goes until November 1stthe government will not be able to send disability checks to over five million veterans. Veterans comprise 30% of the federal workforce and many rely on benefits checks to maintain their standard of living. Military benefits for education are still being processed, but that could change if the shutdown goes through November.

Here’s hoping that a resolution can be found to end the government shutdown.