In testimony before the Senate Finance Committee, Lew said that trying to make such perilous choices between paying veterans or Social Security checks is not a good option and risks the first default on U.S. debt in history. He repeated the administration's demand that Congress pass legislation needed to end a partial government shutdown and raise the country's $16.7 trillion borrowing limit.
In what could be a breakthrough, House Speaker John Boehner will ask Republicans to approve a short-term extension of the U.S. government's borrowing authority, Republican aides said Thursday.
President Barack Obama was to meet later Thursday with top House Republicans at the White House to seek a path beyond a confrontation that has left the government shuttered for close to two weeks.
"The president remains willing to negotiate over the future direction of fiscal policy, but he will not negotiate over whether the United States should pay its bills," Lew told the committee.
Lew's testimony came after a day of activity but no real signs of progress.
Obama on Wednesday had House Democrats over to the White House. And Republican conservatives heard a pitch from the House Budget Committee chairman, Rep. Paul Ryan, R-Wis., on his plan to extend the U.S. borrowing cap for four to six weeks while jump-starting talks on a broader budget deal.
The deal Ryan proposed could replace cuts to defence and domestic agency budgets with cuts to benefit programs like Medicare and reforms to the loophole-cluttered tax code. Curbs to "Obamacare" were not mentioned.
At the hearing, Sen. Orrin Hatch, R-Utah, accused the Obama Administration of intentionally scaring the public and financial markets over the borrowing limit, "in an apparent effort to whip up uncertainty in the markets."
Hatch said the administration was refusing to "even have a conversation" over reducing the soaring cost of the government's big benefit programs such as Social Security and Medicare.
"If the Obama administration won't negotiate on entitlements in the context of the debt limit, when will they negotiate on entitlements," Hatch asked.
Lew said that the government's payment systems were not designed to allow him to pick and choose which bills to pay out of the 80 million payments the government makes each month.
"Prioritization is just default by another name," Lew said.
Lew said default would cause serious damage as outlined in a report Treasury issued last week.
That report, Lew said, "points to the potentially catastrophic impacts of default, including credit market disruptions, a significant loss in the value of the dollar, markedly elevated U.S. interest rates, negative spillover effects to the global economy and real risk of a financial crisis and recession that could echo the events of 2008 or worse."
In 2008, a serious financial crisis pushed the country into the deepest recession since the 1930s.
Republicans on the committee insisted that Obama would have to agree to negotiations as a way to end the current stalemate.
"If you are saying, you give me everything I want and then we can have a conversation on things that are important to you, I find that shocking," Republican Sen. Pat Toomey of Pennsylvania told Lew.
Toomey said that if Obama doesn't agree on spending reforms, "There appears to be a real chance that Congress will not pass a debt ceiling increase before Oct. 17."
Toomey pressed Lew to say whether he could provide assurances to the millions of investors who hold Treasury securities that the administration would do everything possible to make sure that payments were made on those obligations.
But Lew refused to provide such an assurance. "The only way to make sure we can pay all of our obligations is to raise the debt ceiling," he said.
Associated Press writer Stephen Ohlemacher contributed to this report.