Let me try to explain again why there is a threat to the payment of Social Security benefits in August. I'll do it in a Q and A manner. The problem is that the people who want and need to know this sort of thing are unlikely to read through this.
Question: How can there possibly be a threat to the payment of Social Security benefits -- Social Security is taking in enough money each month to pay benefits?
Answer: Actually, Social Security is no longer taking in quite enough money to cover each month's benefits. Due to the aging of the baby boomer population, the trust funds are actually going down very slightly, although this may vary from month to month depending upon tax receipts. But that is not the real problem. The real problem is that the tax receipts don't arrive at the U.S. Treasury in one big lump sum at the beginning of each month. They come in drips and drabs throughout the month. A big chunk of Social Security payments are due to be made on the 3d of each month and there won't be enough money in the U.S. Treasury to make that payment on the 3rd of August.
Question: What's the Treasury got to do with it?
Answer: By law, the Secretary of the Treasury is the managing trustee of the Social Security trust funds. By law, all Social Security payments are made from the U.S. Treasury.
Question: Why doesn't Social Security just sell to the public some of those U.S. government bonds it is invested in?
Answer: It can't. The law says those bonds can't be sold to the public. They're non-marketable.
Question: If they can't be sold to the public, who can they be sold to?
Answer: They can be sold to the U.S. Treasury but if the debt ceiling isn't raised, the Treasury won't have money to buy back any of the bonds.
Question: Why not just sell some Treasury bonds to the public and use that money to redeem some of Social Security's non-marketable bonds?
Answer: To avoid going over the debt cap, the Treasury would have to redeem Social Security's bonds first and then sell Treasury bonds to the public. There wouldn't be money in the Treasury to redeem Social Security's non-marketable bonds.
Question: Does this mean that no Social Security benefits will be paid if the debt ceiling isn't raised?
Answer: No, it just means that the checks due to be paid on August 3 can't be paid in full, on-time. They can be paid, at least in part, later in the month. However, a failure to raise the debt ceiling would create chaos at the U.S. Treasury.. It is unclear exactly when payments would go out.
Question: You say that Social Security might not be paid in full but why?
Answer: Social Security's cash receipts do not quite cover the payments it needs to make but more importantly, failure to raise the debt ceiling would leave the government without the money to meet many crucial obligations. No one wants Social Security recipients to be left without part of their checks but no one wants to close federal prisons and release all of those prisoners. No one wants to stop Medicare and Medicaid. No one wants to stop paying soldiers in the field. No one wants to send all the air traffic controllers home. No one wants to stop paying those who work in the Border Patrol. Total up all these and many other crucial functions and you've got more money that needs to be paid than the government's cash flow. Something's gotta give. It is possible that Social Security payments would be reduced to help out in this impossible situation.
There's also a possibility that money that should be paid to Social Security beneficiaries would have to go to service the U.S. debt. Some U.S. bonds sold in the past will be coming due in August. Normally, this debt would be rolled over by issuing new bonds. The problem is that because of the debt ceiling, the Treasury won't be able to issue new bonds before paying off the old bonds. Where does the money come from to do that? This would be temporary but a big problem. Of course, the problem would become immense if the U.S. could not sell new bonds because of the chaos at the Treasury, which is a real possibility.
Question: Why are we so worried about the bondholders?
Answer: The U.S. Constitution says that the validity of U.S. bonds may not be "questioned." In any case, trying to stiff the bondholders would make it impossible for the U.S. to borrow money would certainly cause a collapse in world financial markets.
Question: This proves that the Social Security trust funds are a myth, doesn't it?
Answer: The nature of the Social Security trust funds has never been a secret. Most people have misconceptions about the nature of the trust funds. They think, literally, that there is some pot of dollar bills somewhere with their name on it or they think that there is some huge pot of dollar bills somewhere labeled "Social Security trust fund." The fact that there are common misconceptions about the trust funds does not make the trust funds a myth.. The U.S. government bonds in the trust funds are real. The existence of the trust funds is the crucial reason that Americans believe that they "own" their Social Security benefits. We should all agree that this sense of ownership is no myth. It is of crucial political importance. It is why there is almost no chance that those who want to destroy or dramatically alter Social Security will succeed. No other sort of trust fund has ever been a realistic possibility.
Labels: Debt Ceiling, Trust Funds
