If there's a default on the federal debt it would affect the market value of previously federal bonds. If the prevailing interest rate jumps, to let's say 8%, investors will pay a good deal less for previously issued bonds paying only 2.5%. Would that affect the value of the federal bonds held by the Social Security trust funds? I know that they can't sell the bonds on the open market but wouldn't a default affect the value of the bonds held in the trust fund? How do they value them on their books?
Also, I can imagine that if there is a delay in paying interest or principal on bonds that this could affect regular payment of benefits. The agency might not be able to get the money needed to pay benefits if they can't get money from their T-bills in time.
On the other hand, a big increase in interest rates would help the trust funds gain more interest payments on newly issued bonds but, then, the major recession produced by a default on U.S. bonds certainly wouldn't help receipts and much higher inflation would definitely hurt the trust funds -- as well as beneficiaries.
I hope and expect that all of this will remain theoretical. The consequences of a federal default are hard to even contemplate.
Market interest rates have no effect on the bonds currently in the trust fund. They are not marketable and therefore do not change in price when interest rates fluctuate. New bond purchases would be affected by prevailing rates (the rate on the special issue bonds in the TF are based on a hybrid of bonds of varying maturity). Some of the trust fund bonds are being rolled over when they reach maturity, but expenditures exceed benefits so new bond accumulation is minimal.
ReplyDeleteIf the government cannot pay off debts previously issued, even to themselves then this would affect ability to pay current benefits. If the Treasury is allowed to prioritize repayment then it’s possible they could pay full benefits. No one really knows how this would actually work in practice since we’ve never defaulted before.