The Treasury may have to engage in complex financial maneuvers harmful to the Social Security trust fund if Congress does not raise the ceiling on the federal debt before its August recess, the Treasury Department warned yesterday.
"It will not be possible to pay Social Security benefits on Sept. 3 without taking actions that could adversely affect the Social Security trust funds," Charles O. Sethness, assistant secretary for domestic finance, said during the announcement of the Treasury's quarterly financing yesterday.
If the government is not allowed to borrow more money and increase the amount of debt held by the government, then it will have to redeem Treasury securities invested in the trust fund earlier than normal, which means the trust funds would lose interest, Treasury officials said.
"Even though these actions would be taken exclusively to pay benefits, they would result in lost earnings to the trust funds," Sethness said. "Congress will not return from its August recess until after Sept. 3. Therefore, to avoid these losses and their adverse psychological effect on Social Security recipients, and because Treasury cannot assure that there will be sufficient cash on Sept. 2, we strongly urge Congress to increase the debt limit prior to the August recess."
Last fall, when Congress failed to raise the debt ceiling in time, the Treasury used the same tactic to prevent a default, but some members of Congress were critical of such a use of the Social Security trust fund.
The limit on the debt is $2.078 trillion. As of last Friday, Treasury had accummulated $2.072 billion, and it is asking that the ceiling be raised to $2.323 trillion.
The House already has approved the new limit, but the Senate, which plans to recess Aug. 15, has not acted, and the Treasury could run out of cash on Sept. 2, Sethness said.
Sethness also said that the Treasury is still considering whether to reduce the 7.5 percent guaranteed minimum rate on U.S. savings bonds, which has made their yield higher than some market securities.
Sethness announced that the Treasury is offering $28 billion in securities to refund $14.3 billion of publicly held coupon securities maturing on Aug. 15 and raise about $13.7 billion of new cash.
Market analysts said the offering was smaller than expected.
"The only thing you really could talk about is, did it come in below consensus expectations," William V. Sullivan, senior vice president at Dean Witter Reynolds, said of the refunding.
The securities to be auctioned are:$9.5 billion of 3-year notes maturing on Aug. 15, 1989, to be auctioned on Tuesday in minimum denominations of $5,000. $9.5 billion of 9 3/4 year notes maturing on May 15, 1996, to be auctioned Wednesday in minimum denominations of $1,000. $9 billion in 29 3/4 year bonds maturing on May 15, 2016, to be auctioned on Thursday in minimum denominations of $1,000.