Debt Limit Showdown: Government Nearly Defaults On Social Security Payments

Debt Limit Showdown: Government Nearly Defaults On Social Security Payments

Social Security and Medicare narrowly escaped the bullet, temporarily at least, during the recent battle over lifting the nation’s borrowing limit. Seniors received their Social Security payments on time and Medicare claims continue to be paid. Nevertheless, there’s plenty to worry about as the next phase of the battle begins.

The first big worry is cash flow to cover benefit payments. The debt limit crisis cast new doubt on the claims that the Social Security Trust Fund is “fully funded” and solvent through 2036. If Congress had NOT acted to raise the debt limit by August 2, 2011, the government might have defaulted on Social Security payments. An analysis by the Bipartisan Policy Center showed that by August 3rd, the day AFTER the government hit the August 2nd debt limit, a $23 billion Social Security payment came due, but without the ability to borrow to pay benefits, the government would have only had $12 billion in payroll tax revenues to cover that payment. From there the situation would have gotten worse. Since last year, Social Security has been paying out more in benefits than it receives in payroll taxes.

So what happened to the Social Security Trust Fund? “On paper, the program is supposed to rely on the assets in the Social Security Trust Fund,” says TSCL Executive Director, Shannon Benton. “In practice that means the government must borrow to cover the payment of benefits when the rest of the federal budget is in deficit and payroll taxes are insufficient to cover the cost. We just learned, there’s a limit to how much Congress and President Obama are willing and able to borrow,” she notes.

The Social Security Trust Fund, on paper, contains about $2.6 trillion in nonmarketable bonds, or I.O.U.s. When the government is under the debt limit and can borrow, the Treasury borrows the difference needed to pay benefits by issuing real bonds to investors and then docking the Trust Fund balance to reflect the transaction. But once the Treasury hits the debt limit, issuing new bonds to the public violates the borrowing limit. Thus, as long as the both the federal budget remains in deficit and revenues remain below the cost of benefits, Social Security payments remain at risk if the federal budget hits the debt limit again.

TSCL is working with Members of Congress on legislation that would reduce the uncertainty for seniors and the disabled. “The Social Security Guarantee Act” (H.R. 1052) was introduced by Representative Walter Jones (NC-3) and would guarantee that Social Security benefits would be paid to current beneficiaries.

Sources: “Debt Limit Analysis,” Bipartisan Policy Center, July 2011.