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Jul 13, 2011

Will Social Security Checks Go Out In August?

I wish I could reassure everyone that there is no threat to the August Social Security checks but I can't. They are truly at risk. If the debt ceiling is not increased by August 2, money will not be available to pay the Social Security checks due out on August 3.
Neither the existence of a dedicated funding source for Social Security nor the existence of the Social Security trust fund will keep this from happening. The FICA tax receipts do not line up exactly with the due dates on Social Security monthly payments. To oversimplify a bit, the U.S. Treasury ordinarily deals with this situation by either taking money out of or putting money into the U.S. government bonds that are the only thing that the Social Security trust funds may be invested in. When the U.S. reaches the debt ceiling, this whole system that ordinarily works smoothly goes haywire. It would be much like trying to keep your family's bank account from being overdrawn if you had an account balance that was measured in pennies. You would have to worry about exactly when  your account would be credited with deposits you make and exactly when a check you write clears the bank. The money will be available to pay those Social Security benefits later in August but the money may be used, in part,  for other purposes because failing to extend the debt ceiling puts the government into a situation where it lacks the money to pay many of its bills. In this emergency situation, the President could do something that would ordinarily be illegal, using money that is supposed to go to Social Security to pay other bills. If you are a Social Security beneficiary, it may make you mad as hell to think that Social Security money would be used to pay other bills but the other bills include paying soldiers in the field and VA benefits and FBI agents and air traffic controllers, for instance. No one wants Social Security recipients to fail to get all their benefits on time but no one wants to avoid paying those other bills.
At the moment, Congress has not extended the debt ceiling. The President and Democrats have put forward a couple of plans to extend the debt ceiling in conjunction with plans to cut future budget deficits. Both plans involved tax increases directed at corporations and wealthy Americans. Republicans have rejected both plans. To the best of my knowledge, Republicans have put forward no specific plan of their own to combine an extension of the debt ceiling with cuts in future deficits although they have stated that they want to reduce future deficits solely by cutting the budget. The Senate Republican leader has put forward a plan to extend the debt ceiling without any cuts in future deficits coupled with an extremely odd plan that would allow the President to increase the debt ceiling  on his own for the next couple of years but also providing that Congress could vote to reject increases in the debt ceiling initiated by the President. This is such as odd plan that so far Democrats do not seem to know what to make of it. Among Republicans, this plan has gotten support from the Republican Speaker of the House of Representatives but is being criticized by many rank and file Republicans. There are also serious divisions among the Republican leadership in the House of Representatives since the number two Republican in the House of Representatives may be trying to undermine the Speaker.
One can say that everyone seems to be getting more serious about the debt ceiling. The prospect of Social Security checks not going out is a major reason for this seriousness. However, at this point, it is far from clear that anything can be passed in either house of Congress. One real problem is that the public and many members of Congress do not understand the gravity of the situation. My best guess is that there will be turmoil in financial markets in the near future if nothing is done -- in addition to a lot of recipients of federal benefits -- to concentrate the attention of the Congress.

Addendum:  If you happen to believe the threat to Social Security benefits is something that a lying Kenyan socialist contrived to scare Americans, I suggest you read David Frum's blog. He has solid right wing credentials.

Addendum: I keep hearing the question: How can this happen? Isn't Social Security a separate account? The answer is that Social Security is a separate account but it is a separate account at the U.S. Treasury. What happens when money is deposited into that separate account? It doesn't sit there in a huge pot of dollar bills. Normally, it is invested in U.S. government bonds. The problem is that failing to raise the debt ceiling puts the Treasury into an impossible bind. It cannot obey the law which requires it to make a lot of payments, including Social Security. The Treasury, and ultimately the President, has to pick and choose which payments get made and which do not. The Treasury also is in a bind because it cannot manage the nation's money properly since cash receipts do not match up with demands to make disbursements. Normally, the Treasury borrows short term money to make sure it can make disbursements without having to worry about when it receives money.
You can certainly look at this situation as proof that the Social Security trust funds aren't "real." However, there are real, practical problems with investing the Social Security trust funds in anything other than U.S. government bonds and there is no practical way for Social Security to do its banking with anyone other than the U.S. Treasury. There is just too much money involved for any private bank to handle it.

Addendum: The Congressional Research Service (CRS) has compiled a very complete report on the way the debt cap can affect government operations, including a detailed look at its effects on Social Security. Please read it if you want a fuller explanation of why Social Security checks may not be paid, at least in full, at the beginning of August if the debt ceiling is not lifted. The CRS is part of the Library of Congress and does research for members of Congress. It is thoroughly non-partisan.

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  • 13 Comments:

    Anonymous Mike B. said...

    The key comment is this: "In this emergency situation, the President could do something that would ordinarily be illegal..." But if he can do something illegal in an emergency, why doesn't he just violate the law setting the debt ceiling? I don't understand the assumption that this law is more important than other laws.

    9:14 AM, July 13, 2011  
    Anonymous EM said...

    So if I understand this correctly, the Social Security funds are not in a separate, protected account, but issue from the General Treasury like all other government payments?

    9:28 AM, July 13, 2011  
    Anonymous Anonymous said...

    The SSA has already made most of it's payments for July and is now paying money into the US Treasury as taxes are received. They should stop forwarding those collections onto the Treasury and start holding onto the taxes so that they can make the August payments. Since the law says SSA money should be seperate from general funds, lets make them completely seperate.

    9:43 AM, July 13, 2011  
    Blogger Don Levit said...

    EM:
    Technically, you are correct.
    All FICA contributions first go to the Treasury.
    Anonymous:
    The law states the funds are separate, only for accounting purposes. Legally, the FICA contributions are taxes that , like all taxes, can be used for the general welfare.
    I agree with you that the flow of funds should change from the FICA taxes that are needed to go to current beneficiaries to go immediately into the trust fund.
    Don Levit

    9:51 AM, July 13, 2011  
    Anonymous Anonymous said...

    If SSA/the Treasury needs to set aside some money to ensure Social Security checks go out in August, they could always delay payment of attorney fees for the rest of this month and into August. :)

    That would provide between $105 and $115 million (based on monthly fees pay from January to June and excluding the outlier month of April) to pay claimants. Assuming an average payment of $1500, that would be 70,000 to 76,667 beneficiaries receiving checks. It would only account for a small portion of total beneficiaries, but it would be a start. And claimant's representatives could absorb the delayed income much easier than their clients.

    3:01 PM, July 13, 2011  
    Anonymous Anonymous said...

    http://market-ticker.org/akcs-www?post=189943

    4:19 PM, July 13, 2011  
    Blogger Don Levit said...

    Anonymous who provided the market-ticker.org web site:
    The author is correct that the total debt will not change by exchanging the $2.6 trillion in the trust fund on a one to one basis for new debt.
    What this does is transform intragovernmental debt into debt held by the public, without raising the total debt.
    Intragovernmental debt is debt owed by one government agency to another - the Treasury owes the $2.6 trillion to the Social Security trust fund.
    While the debt remains as intragovernmental debt, interest can continue to paid into the trust fund by issuing more debt.
    However, when the intragovernmental debt is transformed into debt held by the public, interest will have to be paid from general revenues.
    If there is not enough revenue to pay the interest, then the debt ceiling WILL have to be raised.
    I don't know if this event has happened before. There are about 20 trust funds which comprise intragovernmental debt. I can see how many people could see this as a magical accounting trick, in which the government, in essence, has defaulted.
    The original debt holder was the Treasury. Now, it's the public, with no increase in the total debt? Come on!
    Don Levit

    12:06 PM, July 14, 2011  
    Anonymous Anonymous said...

    http://www.foxnews.com/opinion/2011/07/14/is-obama-crazy-enough-to-not-send-out-social-security-checks/

    4:45 PM, July 14, 2011  
    Blogger Don Levit said...

    Anonymous 4:45
    This link did not work.
    Neither could I access the story by google or even searching on fox news?
    What are your main points?
    Don Levit

    6:02 PM, July 14, 2011  
    Anonymous Anonymous said...

    Consider Obama’s words: “I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it.”

    To people who rely on Social Security to put food on the table and a roof over their heads, that’s an awfully reckless thing for a president to say. It’s also false, because Obama can guarantee Social Security checks go out. In fact, it is entirely in his hands.

    To start with, let’s be crystal clear that there is zero legal or practical reason for Social Security checks to be implicated in the debt ceiling debate. Social Security checks have continued to go out in previous protracted episodes when the debt ceiling was reached in 1985 and 1996. Moreover, in 1996 Congress passed a law amending the Social Security Act to specifically allow Social Security payments to continue to be made when the debt ceiling is reached. The legal mechanism: redeeming the Social Security trust fund bonds (money the general fund owes to Social Security) by issuing debt to the public. Since both types of bonds are included under the legal debt limit, this does not incur any new debt that would breach the ceiling.

    In addition, every single Senate Republican voted for the Toomey-Vitter amendment months ago to guarantee that debt service payments and Social Security would be prioritized over all other government outlays in the event the debt ceiling is reached. Democrats – wanting to keep doomsday on the table as a reckless negotiating tactic – voted no. The House may soon vote on even more comprehensive legislation that would guarantee essential programs are prioritized and that reaching the debt ceiling would result in no worse than a partial shutdown of the federal government.

    Whether or not Congress passes new legislation, the president and Treasury Secretary Tim Geithner already have the legal authority to prioritize payments and to guarantee that bondholders are paid – avoiding a default – and that Social Security checks go out on schedule. Neither of those doomsday scenarios should be the focus of the ongoing debate.
    To the extent Obama insists on threatening not to send Social Security checks, it’s critical that the public understand he is using seniors as pawns in his ongoing attempt to avoid confronting Washington’s spending problem and instead slam the economy with tax hikes that will make our economic challenges even greater.

    The American people are sick of cynical scare tactics as a cover for Washington tax-borrow-and-spend as usual. Before we even consider allowing the federal government to accumulate even more debt for our children and grandchildren to pay, Congress needs to show a serious commitment to putting us on a path to a sound fiscal future.

    They’ll have a great chance next week when they vote on the balanced budget amendment to the Constitution. But I suspect the best opportunity won’t come until August, when Obama backs down from the crazy threats, allows Social Security checks to go out, and finally starts to get serious about cutting spending.

    Phil Kerpen is vice president for policy at Americans for Prosperity

    6:25 PM, July 14, 2011  
    Blogger Martin Finnucane said...

    The SS trust fund is in fact not real. It is an accounting artifact. See this.

    Social Security is our common, collective commitment to supporting the elderly, disabled, and certain dependent minors. The only real constraint on Social Security benefits (the financial status of the "fund" notwithstanding) is the government's ability to provide such benefits, along with other government spending, without overheating the economy and creating inflation. The threat now, and certainly after O'Bushbama pushes through his $4trillion "grand compromise", is deflation. Cutting benefits now, in the name of a non-existent financial constraint, is utter madness.

    Of course, we may see the fund as a promise - "you pay more payroll taxes now, but all that surplus will keep you warm at night in your dotage." Well, promise broken. We don't do promises now - we do backstops. A backstop is sort of a promise, but intended only for those who have no stock in Social Security.

    7:42 PM, July 14, 2011  
    Anonymous Anonymous said...

    This this outrageous, all you guys like to do is take from us Americans. Why don't you all take a huge pay cut and stop wasting money on stuff that isn't needed like all the sidewalks in everett your redoing when nothing was wrong with them, adding the new bridge in east boston making it bigger instead of fixing the orginal one that's waste of money. Instead of wasting money on stupid Sh*t why don't you consider making a game or club place in every so many citys in & around boston to give young children a place to go and hang out & play instead of hanging on the streets killing each other or selling drugs. Oh no wait their not the goverments kids so you don't care long as your kids have their mom & dad making bigg mmoney & buying new cars ,new clothes & stuff like money grows on trees what about us very low income people who can't get anything for our kids. Like me I'm a young disabled mother of two ages 4 & 5 on social security and can't afford to buy things because my income goes straight to rent & bills and have to tell my kids sorry we don't have extra money if the need or want something, an unlike me because I'm america I can't get section 8 or rent help cause all these non americans taken from us & lying about being poor getting all the benefits the housing & drive 20,000 dollar cars come one. If you cut social security benefits hope the goverment has plans and money to help us very low income people get housing when where homeless with kids because we can no longer afford rent. I live off like 1300 amonth between ssi & welfare and rent is 1200 a month I have oil gas lights cable & phone bill along with supporting two minors struggling everyday cause I can't get help. This goverment is messed up . Why don't you guys cut your pay in half and give back to us americans instead of taken from us so you all can sit back with your feet up getting waited on hand and food. Sorry there's families out there like me that wasn't handed the golden sppon like you. Wake up & help us don't take from us when we are the ones in need, try walking one month in my shoes & see how it is to struggle or hear you kid cry there shoes hurt them or they see someone with a new toy or clothes and ask why can't they have it too.

    8:04 PM, July 14, 2011  
    Blogger Don Levit said...

    Martin:
    Thanks for posting this article, It accurately describes the SS trust fund.
    On the other hand, I disagree with this statement about government spending and savings:
    "The only entity that can provide the non-government sector with net financial assets (net savings) and thus eliminate unemployment is the government."
    This provides way too much credit and power for the government.
    It makes those of us in the private sector look like helpless beings who cannot save or find full employment without the saviour, our government.
    What did people do up until the 1960s, when the deficits started to accumulate on a regular basis?
    How were they able to work, save, and survive?
    What's wrong with a break-even budget?
    Don Levit

    10:51 AM, July 15, 2011  

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