Will You Get Your Social Security Check if the U.S. Defaults?

Reuters
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Social Security check

By Mark Miller

CHICAGO, Oct 8 (Reuters) - President Barack Obama warnedlast week that Social Security benefits might not go out "ontime" if Congress does not raise the debt ceiling.

Should seniors and disabled American really be worried abouttheir benefits if the U.S. government runs out of borrowingcapacity later this month?

The answer is yes - but only if the Obama administrationinsists on making Social Security a pawn in the debt ceilingbattle. And that's a move it has no business making.

Social Security is a stand-alone program with its owndedicated revenue stream: Workers and employers pay a combined12.4 percent of employees' payroll. It was designed to be a "payas you go" program, with taxes on today's workers fundingcurrent payouts to retired and disabled workers and theirdependents. Those funds can't be used for anything other thanbenefits.

Social Security currently has a surplus of $2.7 trillion.This year it is on track to take in $38.8 billion more inrevenue than it will pay out, according to the forecast of theprogram's trustees. These funds sit in something called theSocial Security Trust Fund (SSTF).

While SSTF funds can be used only for Social Security, thefund operates in a way that could leave it vulnerable in theevent of a government default.

Every dollar of Social Security payroll tax revenue receivedby the U.S. Treasury Department is used to fund generaloperations. Treasury then turns around and issues specialinterest-bearing Treasury notes to the SSTF matching the amountof payroll taxes it has received (and spent).

To fund benefit payments every month, the Social SecurityAdministration redeems bonds from the SSTF with the shortestmaturity, receiving principal plus interest. The governmentfinances Social Security redemptions by issuing newgeneral-issue Treasury bonds. This is the nub of a keyright-wing critique of Social Security - namely, that it's aPonzi scheme, and that it has no real assets. Nothing could befurther from the truth.

The reality: The SSTF actually is one of the largestcreditors of the U.S. Treasury - right up there with China andJapan, which together hold $2.4 trillion in Treasury debt. Thesystem was designed this way to ensure that Social Securitywould be invested only in the world's - ahem - safestinstrument: paper issued by the U.S. Treasury.

The special-issue Treasury notes are backed by the fullfaith and credit of the U.S. government, and the system worksfine when the Treasury has the power to issue debt to fundSocial Security's bond redemptions. Even if the government hitsthe debt ceiling, there's a viable option for keeping SocialSecurity benefits flowing without affecting the federal debtsituation in any meaningful way.

The Social Security trustees could exercise their right tocash in as many Social Security bonds as they need to makebenefit payments for the foreseeable future. Every dollar ofprincipal (but not interest) that the federal government paysback to Social Security would reduce the government's totalindebtedness, making room to borrow more from the general publicto fund Social Security redemptions. The total amount of federaldebt would be unchanged, and wouldn't reduce funds available forother government operations.

Social Security's managing trustee is Treasury SecretaryJacob Lew, so he actually has conflicting obligations here - toserve the president and protect the rights of Social Securitybeneficiaries. (So do the three other top government officialswho serve as trustees - the secretaries of Health and HumanServices, the Labor Department and the commissioner of theSocial Security Administration.)

Scaring seniors and disabled people might make for goodpolitics, considering the huge stakes of the debt ceilingbattle. That doesn't make it right.

Last year, 56.7 million retired and disabled workers,spouses or children received Social Security retirement ordisability benefits. Many depend on the benefits to buy food andpay for rent and utilities.

One-third of today's seniors rely on Social Security for 90percent or more of their income, according to the NationalAcademy of Social Insurance. Two-thirds count on it for morethan half their income.

Nancy Altman, co-director of the Strengthen Social Securityadvocacy coalition and an expert on Social Security law andhistory, argues that Lew and Obama have a duty to keep SocialSecurity out of the fight.

"Social Security is different from paying a militarycontractor, or food inspectors," Altman says. "Those things arepaid from the general fund, where there's a deficit. SocialSecurity is a real pension program backed by very substantialassets, and the president has an obligation to act as afiduciary and protect that."

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