COLUMN-Will you get your Social Security check if the U.S. defaults?
By Mark Miller
CHICAGO Oct 8 (Reuters) - President Barack Obama warned last week that Social Security benefits might not go out "on time" if Congress does not raise the debt ceiling.
Should seniors and disabled American really be worried about their benefits if the U.S. government runs out of borrowing capacity later this month?
The answer is yes - but only if the Obama administration insists on making Social Security a pawn in the debt ceiling battle. And that's a move it has no business making.
Social Security is a stand-alone program with its own dedicated revenue stream: Workers and employers pay a combined 12.4 percent of employees' payroll. It was designed to be a "pay as you go" program, with taxes on today's workers funding current payouts to retired and disabled workers and their dependents. Those funds can't be used for anything other than benefits.
Social Security currently has a surplus of $2.7 trillion. This year it is on track to take in $38.8 billion more in revenue than it will pay out, according to the forecast of the program's trustees. These funds sit in something called the Social Security Trust Fund (SSTF).
While SSTF funds can be used only for Social Security, the fund operates in a way that could leave it vulnerable in the event of a government default.
Every dollar of Social Security payroll tax revenue received by the U.S. Treasury Department is used to fund general operations. Treasury then turns around and issues special interest-bearing Treasury notes to the SSTF matching the amount of payroll taxes it has received (and spent).
To fund benefit payments every month, the Social Security Administration redeems bonds from the SSTF with the shortest maturity, receiving principal plus interest. The government finances Social Security redemptions by issuing new general-issue Treasury bonds. This is the nub of a key right-wing critique of Social Security - namely, that it's a Ponzi scheme, and that it has no real assets. Nothing could be further from the truth.
The reality: The SSTF actually is one of the largest creditors of the U.S. Treasury - right up there with China and Japan, which together hold $2.4 trillion in Treasury debt. The system was designed this way to ensure that Social Security would be invested only in the world's - ahem - safest instrument: paper issued by the U.S. Treasury.
The special-issue Treasury notes are backed by the full faith and credit of the U.S. government, and the system works fine when the Treasury has the power to issue debt to fund Social Security's bond redemptions. Even if the government hits the debt ceiling, there's a viable option for keeping Social Security benefits flowing without affecting the federal debt situation in any meaningful way.
The Social Security trustees could exercise their right to cash in as many Social Security bonds as they need to make benefit payments for the foreseeable future. Every dollar of principal (but not interest) that the federal government pays back to Social Security would reduce the government's total indebtedness, making room to borrow more from the general public to fund Social Security redemptions. The total amount of federal debt would be unchanged, and wouldn't reduce funds available for other government operations.
Social Security's managing trustee is Treasury Secretary Jacob Lew, so he actually has conflicting obligations here - to serve the president and protect the rights of Social Security beneficiaries. (So do the three other top government officials who serve as trustees - the secretaries of Health and Human Services, the Labor Department and the commissioner of the Social Security Administration.)
Scaring seniors and disabled people might make for good politics, considering the huge stakes of the debt ceiling battle. That doesn't make it right.
Last year, 56.7 million retired and disabled workers, spouses or children received Social Security retirement or disability benefits. Many depend on the benefits to buy food and pay for rent and utilities.
One-third of today's seniors rely on Social Security for 90 percent or more of their income, according to the National Academy of Social Insurance. Two-thirds count on it for more than half their income.
Nancy Altman, co-director of the Strengthen Social Security advocacy coalition and an expert on Social Security law and history, argues that Lew and Obama have a duty to keep Social Security out of the fight.
"Social Security is different from paying a military contractor, or food inspectors," Altman says. "Those things are paid from the general fund, where there's a deficit. Social Security is a real pension program backed by very substantial assets, and the president has an obligation to act as a fiduciary and protect that."