Could Americans Feel Impact of Shutdown in Their Wallets?

Seniors' checks won't be impacted but shutdown could shake consumer confidence.

Feb. 28, 2011— -- How would a government shutdown impact Americans far removed from the partisan wrangling in the nation's capital?

Most Americans are unlikely to feel a direct impact -- seniors will likely continue to get their Medicare and Social Security checks, as will veterans. But a government shutdown could hurt consumer confidence and further roil already volatile financial markets. Some experts say it could even set back economic recovery, especially if prolonged.

Democrats, Republicans and President Obama have until Friday to hash out a plan to keep federal government agencies -- everything from the military to the Department of Agriculture -- funded until October.

If the two sides aren't able to reach consensus, only "essential" staff at federal agencies would continue to work but "non-essential" federal employees will be furloughed. A federal employee is considered "essential" when they are "necessary to protect life and property" and are needed to perform an "orderly shutdown of emergency operations."

As for what Americans can expect, museums and national parks will shut down, the national zoo will close, government services such as toxic waste cleanup will cease, the release of census data may be jeopardized, passport applications will be delayed and federal services in general will slow.

However, the U.S. postal service will continue to operate as normal since that agency is self-funded. So will the military and critical security agencies such as the Transport Security Administration and Coast Guard.

Seniors can rest assured that they will likely continue to receive their Social Security and Medicare checks. Agencies can still disburse funds through past appropriations -- think savings account -- and maintain employees to process the payments.

But the White House has warned there could be possible delays, and if the last shutdown in 1996 is any indication -- seniors should be ready for them.

"Some recipients, new retirees, new applications might not receive their checks. If retirees have questions about their checks, if they didn't get their check in the mail, if they have a change of address, all those things could prevent them from getting their check," White House Press Secretary Jay Carney said on Thursday.

In 1996, the Social Security Administration, unable to keep employees because of lack of funding, had to delay processing and payment of new entitlement claims. There was no one to answer phones at Social Security offices and the agency had to eventually request money to bring back some of the furloughed employees.

The financial and economic impact is likely to be much greater. Stock markets could take a hit, and people are likely to tighten their pocketbooks even further amid increased anxiety.

A shutdown "would matter tremendously but not for the reason of people not getting back their checks issued," said Phillip Swagel, former assistant Treasury secretary and now a visiting scholar at the American Enterprise Institute. "It impacts consumer spending, business investment. If there's no confidence, people will stop spending, businesses will stop hiring. We have an economy that's fine but it's still pretty fragile. It would be a disruption that I think would set back our recovery."

Consumer confidence is important because it shows how much faith Americans have in their government.

"It would just show Americans that our government isn't really equipped to come to agreements and really handle the challenges facing the country," Swagel added.

Neither side is likely to prolong the shutdown, if it happens, and will likely come together on an agreement sooner than later.

The partial government shutdown of 1996, the second in President Bill Clinton's administration, was hugely unpopular and sent Republicans toppling down in the polls.

Shutdown Looming: How Would it Impact You

In today's economic climate, it's difficult to predict the real impact of a shutdown but some say given the uncertainty it could be worse than in 1995.

"When you are on thin ice, which the country is in right now because we're in an unsustainable situation, small tremors can have large repurcussions and they might not normally," said Maya MacGuineas, president for the Committee for a Responsible Federal Budget. "The global markets are watching the U.S. with more closer eyes than they have in the past and it's impossible to predict what shivers this might send through the market, that's why we need to get the overall budget situation under control so we're not so vulnerable."

A confidential report prepared by Goldman Sachs for its clients estimated that while the potential for a shutdown does not present a major risk, for each week the federal government is closed, federal spending would reduce by around $8 billion, and could reduce real GDP growth by as much as 0.8 percentage point at an annualized rate in the quarter it occurred.

The impact would be more pronounced if the shutdown lasted for more than a week, the report suggests.

Just like individuals, federal agencies eventually have to pay the bills and if they don't have any money allocated, that would be close to impossible.

Federal government contractors are likely to feel a bigger pinch in their pocketbooks. Already in a continued limbo by the uncertainty of their future source of funding, contractors -- unlike federal employees -- will not be paid for the time they were furloughed.

Over the long term, the bigger issue will be whether to raise the debt ceiling and tackling the deficit crisis that is burdening the U.S. economy.

Administration officials say raising the debt ceiling is necessary to prevent a default but Republicans argue that such a move won't provide a long-term fix.

"If the debt ceiling was not raised, there would be a significant problem in funding the government and I think you could have interest rates moving higher with the dollar being hit significantly," said Lynn Reaser, chief economist at Point Loma Nazarene University and former economist at Bank of America. "The U.S. would appear riskier to investors both here and abroad and that would push interest rates up significantly. The offset would be some potential slowing in overall economic growth."

Interest rates are likely to rise amid greater uncertainty, and with the housing market still struggling to recover from the collapse, it could make the situation even more detrimental.

In an ABC News/Washington Post poll conducted shortly after the nearly three-week partial shutdown in 1995 and 1996, 75 percent of Americans said it had been a "bad thing" and about 50 percent blamed Republicans in Congress for its occurring. But 50 percent approved of how Bill Clinton handled the situation, versus 22 percent approval for the Republicans.

While the shutdown was broadly unpopular, most people by far, 88 percent, said they had not been personally inconvenienced by it.

Gary Langer contributed to this report.