— President Obama, July 12, 2011
“So are we really going to start paying interest to Chinese who hold Treasuries and we're not going to pay folks their Social Security checks?”
— President Obama, June 30, 2011
The president’s language has evolved on whether $23 billion Social Security checks will get paid on Aug. 3, the day after the administration says the U.S. government will reach the debt limit.
Last week, at a news conference, he suggested the Treasury could not make Social Security payments if it wanted to keep paying interest to bond holders and not default on the debt. Tuesday, in an interview with CBS News, he added some caveats — that there was no “guarantee” or that there “may” not be enough money.
(If you look at the full exchange, which is at the bottom of this column, you will see Obama never directly answers a question about Social Security checks. He dodges it by saying, “This is not just a matter of Social Security checks. These are veterans’ checks, these are folks on disability and their checks. There are about 70 million checks that go out.”)
Clearly, if the debt limit is reached, the nation’s finances would be pretty rocky. The Bipartisan Policy Center recently issued an interesting report that looks day by day at how much money would be going into the government and how much is committed to go out. On Aug. 3, for instance, the daily inflow is estimated to be $12 billion, compared to $32 billion in committed spending that day (most of which would be the Social Security checks.)
But what if there is a way to keep paying Social Security benefits, despite hitting the debt ceiling?
The answer to this question is highly technical. The Bipartisan Policy Center report, which looked closely at the problem, is silent on this issue. We queried the administration about this when Obama made his statement last week, and got a confusing answer. In effect, we were told, the answer is complex but as a practical matter is no, because there would not be enough cash to pay benefits.
But others, including Jason J. Fichtner, a former deputy Social Security administrator during the Bush administration now at George Mason University, believes this explanation is unsatisfactory. He notes that Social Security holds $2.6 trillion in special-issue Treasury securities. Those bonds are part of the $14.3 trillion debt amassed by the U.S. government, and benefits are paid out of those securities.
So, the theory goes, if Treasury redeemed the needed Social Security bonds, and issued new marketable Treasury bonds to make good on the Social Security bonds, it would be a one for one swap and the debt ceiling would not be increased.
There is a technical wrinkle involving the fact that payroll taxes that are collected are supposed to be immediately turned into Treasury securities, but there could be ways around that, such as putting the monies in a noninterest bearing account, as during the 1985 debt crisis. “Although some of the Secretary’s actions appear in retrospect to have been in violation of the requirements of the Social Security Act, we cannot say that the Secretary acted unreasonably given the extraordinary situation in which he was operating,” the General Accounting Office later concluded.
“I'm now 99.9 percent positive that Treasury has legal authority to pay Social Security benefits in both cases of a government shutdown and hitting the debt limit, since the payment of benefits shouldn’t affect the debt limit because it reduces the trust funds to the exact extent that it increase publicly-held debt,” Fichtner said. “What I don't know is whether Treasury has to pay benefits if it chooses not to.”
Dean Baker, co-director of the Center for Economic and Policy Research who has derided “the phony crisis” of Social Security, also believes the checks could keep flowing. “I would think that they could legally pay Social Security by reducing the obligations of the fund,” he said. “It no doubt would be a huge political issue.”
Still, during the 1996 debt limit crisis, Treasury Secretary Robert Rubin announced that Treasury did not have sufficient funds to pay Social Security benefits. Congress rushed to pass a special law that said the Social Security benefits did not count against the debt limit. Was this designed to pressure the Republican-led Congress, or had even a shrewd operator like Rubin run out of options? However, Congress later that year passed a law, PL 104-121, that codified Treasury’s authority to use Social Security trust funds to pay benefits and administration expenses in the event a debt ceiling is reached, which could give the administration the authority they need in the current crisis.
The Congressional Research Service has also explored this question in a series of reports this year. The answer is unfortunately inconclusive and buried in a footnote: “Under normal procedures Treasury pays Social Security benefits from the General Fund and offsets this by redeeming an equivalent amount of the trust funds’ holdings of government debt. In order to pay Social Security benefits, and depending on the government’s cash position at the time, Treasury may need to issue new public debt to raise the cash needed to pay benefits. Treasury may be unable to issue new public debt, however, because of the debt limit. Social Security benefit payments may be delayed or jeopardized if the Treasury does not have enough cash on hand to pay benefits.”
However, if Treasury can use the Social Security bonds to pay Social Security bonds, potentially that could open up the question of whether other nonmarketable securities – such as $700 billion in Civil Service funds – could be temporarily redeemed to raise cash. However, the legal link between these funds and other functions of government does not appear as strong as between Social Security trust funds and Social Security benefits.
Late Tuesday night, however, the Treasury Department cast serious doubt on whether it was feasible to keep paying Social Security benefits if the debt limit had been breached.
“This type of financial engineering is untested, may not work, and is of questionable legality,” a Treasury official told us. “It is not feasible for Treasury to borrow from the public, each day, the precise amount of Social Security payments due without breaching the debt limit. In addition, it is questionable whether it is legal to redeem Social Security trust fund assets in advance of payments. Moreover, this presumes that Treasury will have full access to the financial markets if the debt limit is not raised.”
The Pinocchio Test
The president obviously does not want to show all of his cards in this high-stakes game of poker. Raising the specter of not issuing Social Security checks is designed to raise pressure on Republicans, but could also cause angst among the elderly.
At this point the answer is unclear but we become suspicious when politicians begin to use “may,” rather than speak in definitive sentences. If Treasury has the ability to keep paying Social Security benefits, even if the debt limit is reached, the Obama administration should make that clear. The Treasury Department’s new statement begins to add some clarity. We will keep watching how the president speaks about this issue.
Watch Obama talk about Social Security
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