UPDATE 2-Prioritizing which U.S. bills to pay would be "chaos" -Lew
WASHINGTON, Oct 10 (Reuters) - The Obama administration said on Thursday that a looming U.S. default would hit everyone from Social Security pensioners to bondholders and urged Congress to raise a cap on government borrowing to avoid a crisis.
Appearing before lawmakers, U.S. Treasury Secretary Jack Lew tried to shoot down the notion that America could prioritize between its many payment obligations.
He warned lawmakers that later this month the government might miss payments on pensions and health care for the elderly, as well as salaries for the nation's soldiers.
While missing non-debt payments could over time push the economy into recession, a missed debt payment could potentially trigger an even more profound financial crisis.
"I don't believe there is a way to pick and choose on a broad basis. This system was not designed to be turned off selectively," he told a Senate hearing.
Lew said there was no way the nation's payment system would operate smoothly if President Obama chose to try to prioritize which obligations get paid. "It would be chaos," he said.
Washington takes in about 70 cents in taxes for every dollar it spends, so it must borrow to pay its bills. Unless Congress raises the nation's $16.7 trillion debt ceiling soon, Lew said the government would run out of borrowing authority by Oct. 17.
That means it would begin defaulting on its obligations soon after, something Lew said would cause a "crisis."
Lew also said the legal issues regarding prioritization of interest and principal on debt are complicated.
He said gridlock in Washington was already hurting the U.S. economy. The country's political dysfunction has already led the government to partially shut down, which is sucking money out of the economy by delaying payments to many federal workers.
"We now face a manufactured political crisis that is beginning to deliver an unnecessary blow to our economy," Lew said, adding that uncertainty over the possibility of default was already weighing on financial markets.