Treasury Secretary Jacob Lew urges the Senate Finance Committee to reopen the government and lift the U.S. borrowing cap during testimony Thursday on Capitol Hill in Washington. ( Evan Vucci / AP)

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Treasury Secretary Jacob Lew warned Thursday the nation is just seven days from its first default in 224 years, something that will affect the lives of every American and put at risk the paychecks of government workers and the benefits of 3.4 million disabled veterans. 

No later than Oct. 17, the U.S. will have run out of borrowing power and be unable to pay its bills, Lew told the Senate Finance Committee.  While some Republicans have discounted the danger, Lew told the Senate Finance Committee it could have “potentially catastrophic impacts.” 

“I have a responsibility to be transparent with the American people about these risks,” Lew said. “ I think it would be a grave mistake to discount or dismiss them.” 

“If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations,” Lew said. 

Among the risks is that the U.S. will not be able to pay salaries for military and federal workers, benefits to Social Security beneficiaries and veterans, and payments to Medicare providers, Lew said. “ A failure to raise the debt limit could put timely payment of all of these at risk,” he said. 

The Treasury Department could be forced to choose who gets paid, Lew said, such as paying either Social Security beneficiaries or disabled veterans; there would not be enough money to fully pay both. “ I don’t know how you could possibly choose.” 

“It is irresponsible and reckless to insist that we experience a forced default to learn how bad it is,” Lew said. 

Lew’s testimony comes as there are bipartisan efforts underway to avoid the immediate crisis of reaching the $16.7 trillion debt ceiling with a temporary extension of four to six weeks that would protect the economy and benefits checks while giving time for budget negotiations.  This is not going to be a simple issue to resolve, however, as there is a push for any increase in the debt ceiling to be matched by cuts in federal spending. 

One idea being discussed is to approve a long-discussed and controversial proposal that would change how cost-of-living adjustments are calculated for inflation-adjusted federal benefits, such as military and federal civilian retired pay and Social Security.  The adjustment would result in annual increases that are 0.3 to 0.5 percentage points less than under the current Consumer Price Index formula used for automatic benefits increases — which might seem a small impact, but over time erodes the value of a benefit.  For example, the lifetime value of military retired pay would be reduced by about 8 percent as a result of the potential COLA change. 

Sen. Max Baucus, D-Mont., the Senate Finance Committee chairman, likened the situation to the U.S. “looking for spare change in the couch” because it will be able to spend only what cash it has on hand.  Treasury officials estimate the U.S. will have about $30 billion in cash plus whatever revenue it takes in after Oct. 17 to pay expenses. 

“While the government shutdown has been disruptive, a default would be a financial heart attack,” Baucus said. “ If the debt ceiling is breached, the government would immediately have to slash federal spending by 20 to 30 percent, driving the nation back into a recession.”