Late last night, the departing Speaker of the House
announced a
tentative deal aimed at heading off a government
shutdown and debt crisis. While this agreement may be good for the country, the
timing is inconvenient for me and my latest article on Social Security and the
debt ceiling.
The article says that Social Security is the one function of
government that is virtually exempt from the consequences of the debt ceiling.
This piece is compelling when politicians are baiting seniors over their
benefit checks. It becomes less interesting once seniors cease to worry about
whether there is enough money in the coffers to cover the next round of benefit
checks.
Where are partisan politics when you need them?
What is the debt ceiling? The debt ceiling limits the amount
of debt that the U.S. Treasury can issue. When the level of the government’s
debt exceeds the legal limit, government spending is limited to the revenue
collected by the government because it cannot borrow money.
Social Security is largely unaffected by this event because
the system has layers of dedicated funding. The program has exclusive claims on
payroll tax revenue. Beyond that line of funding, Social Security has a trust
fund with more than $2.7 trillion in dedicated funding.
The mechanics of the Social Security program are poorly
understood even by experts. Ed Lorenzen, a budget analyst at
the Center for a Responsible Federal Budget, says
it would be like a homeowner paying the mortgage but not all of his or her
utility bills. Actually it would be like the utility expecting to invade the
escrow account with the bank that holds the mortgage.
The debt held by the Social Security Trust Fund can be
refinanced without increasing the total debt outstanding. The government has to
issue bonds which will increase the debt outstanding. The proceeds are however used to pay down
debt. The net impact on total
outstanding debt is zero.
The last person to play the Social Security card in a debt
ceiling debate was Treasury Secretary Jacob Lew. He is of course the last person who should be
playing this card because he happens to be managing trustee
of the Social Security Trust Funds.
As such, it
is his job to manage the resources of the trust fund to anticipate foreseeable
events such as the debt ceiling crisis. In fact, he recently signed a letter to Congress assuring the
public that the Social Security Trust Fund had sufficient resources to pay
benefits for more than three years.
So if there were any truth to his claim, he would be pleading the fifth rather
than publically admitting to the largest breach of fiduciary responsibility in
the history of mankind.
Let’s assume that the Treasury employees who process payroll
taxes are sent home. No one collects
payroll taxes. In that case, Social Security would draw on the resources of the
Trust Fund. Let’s assume that Secretary
Lew is completely remiss in his responsibilities, and has failed to build a
cash reserve in the Trust Fund. The government can still pay the bills of
Social Security because refinancing the debt held by Social Security has no
impact on the overall national debt.
Life is stranger than fiction. When Social Security has excess cash, the program is required to invest the money in government securities. Once the debt ceiling limits the government’s ability to borrow money, any excess cash would sit uninvested, while the rest of the government shuts down from lack of funding.
Social
Security will plenty of money to pay the check.
The real question is whether the rest of the government will have the
money to mail it.
