Friday, July 22, 2011

Social Security, the Debt Ceiling, and Obama

I recently came across an interesting piece, going into some detail on the accounting status of the Social Security Trust fund and its relation to the debt ceiling. If it is correct, Obama's claim that running into the debt ceiling could prevent the payment of Social Security checks is either a deliberate falsehood or evidence of striking ignorance. It is not a subject on which I have any expertise, however, and I would be interested in comments from any reader who knows more about it than I do.

The argument is quite simple. Social Security's past surpluses were borrowed and spent by the federal government, creating a federal debt to the Social Security administration in the form of Social Security Trust Fund special bonds, a  liability that counts as part of the national debt. 

Suppose that next month's Social Security revenue is less than Social Security obligations by, say, $20 billion, the number Obama used to CBS Evening News anchor Scott Pelley. The SSA cashes in $20 billion of special bonds, which under current law the treasury is required to redeem, and uses the money to send out social security checks. Cashing in those checks lowers the national debt by $20 billion, so the treasury is now free to borrow $20 billion without exceeding the debt limit, leaving it with the same amount of money to pay other obligations that it would have if the SSA had not needed the money.

If that account is correct, it looks very much as though the President was deliberately misrepresenting the situation, taking advantage of the ignorance of his audience to frighten seniors into supporting whatever policies he proposes to solve the current debt limit problem.

21 Comments:

At 8:25 AM, July 22, 2011, Anonymous Richard Allan said...

Am I missing something? Where does the Treasury get the money? Just because it's "required to redeem" the bonds surely doesn't necessarily mean it can do so.

 
At 8:40 AM, July 22, 2011, Blogger John Goodman said...

Tom Saving is a senior fellow of our organization and a former Trustee of Social Security. What he has to say is accurate. What Obama said is knowingly false. Not that Obama knows it is false, but the administration as a whole certainly knows that their threats are false.

 
At 10:09 AM, July 22, 2011, Anonymous Anonymous said...

Richard: Apparently the government would be allowed to issue regular bonds to pay off these 'special bonds'. Since the special bonds already count towards the debt limit, this additional borrowing wouldn't count as 'new debt'.

 
At 12:02 PM, July 22, 2011, Anonymous David Tomlin said...

Direct quote from the linked article:

'By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration. And when the Treasury does, total government debt subject to the debt limit falls by the amount of the redemption — thus freeing up the Treasury's ability to issue new bonds equal in amount to the redeemed Trust Fund bonds.'

 
At 12:23 PM, July 22, 2011, Blogger Tim Worstall said...

"it looks very much as though the President was deliberately misrepresenting the situation,"

Oh my.

Politicians lie to the electorate?

I'm not quite sure what comes next.

Say it ain't so Joe?

Film at 11?

 
At 12:23 PM, July 22, 2011, Anonymous David Tomlin said...

A little more context might be helpful.

The so-called 'debt limit' doesn't just apply to what the government borrows from outside. It also applies to certain accounting fictions by which the Treasury 'borrows' from other parts of the government. Social Security 'special bonds' are an example of this. They represent money that the Treasury owes to the Social Security Trust Fund, so paying them off reduces the sum that is subject to the debt limit. That is why, until these bonds are exhausted, freezing the debt limit won't affect Social Security.

 
At 12:47 PM, July 22, 2011, Anonymous Anonymous said...

Let me get this straight. The accounting fiction known as SS Trust Fund special bonds, which the government owes to itself, actually counts as debt? And we can redeem some of these fictional bonds, and issue real bonds, and total debt remains the same?

 
At 1:35 PM, July 22, 2011, Anonymous David Tomlin said...

You've got it, Anonymous.

But it seems I was wrong to say 'freezing the debt limit won't affect Social Security.' I should have read the linked article to the end before commenting.

'In Helvering v. Davis (1937), the Supreme Court upheld Social Security's constitutionality because "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way."

'As a result, the federal government can apply the revenues collected from Social Security payroll taxes, and the income taxes collected on benefits collected from higher-income individuals, to any government liability.

'So, when the president says that thanks to the debt ceiling "there may simply not be the money in the coffers" to send out the $20 billion in August Social Security checks, he either does not understand the way the system works, or the administration intends to spend the money on something else.'

 
At 5:14 PM, July 22, 2011, Anonymous Richard Allan said...

Thanks for the clarification, I understand what I was missing now.

 
At 5:35 PM, July 22, 2011, Blogger Mark Scarberry said...

For a more detailed explanation of this, see an op-ed that Nancy Altman (who has written a book about Social Security) and I wrote, and that was published by the Huffington Post (despite my conservative views) two days before Saving's piece: Altman & Scarberry, Disentangling Social Security from the Debt Ceiling, http://www.huffingtonpost.com/nancy-altman/disentangling-social-secu_b_905227.html. I don't agree with Saving's understanding of Helvering, and the trust funds actually grew last year rather than shrinking, but his basic idea is right.

 
At 5:42 PM, July 22, 2011, Blogger Neolibertarian said...

I believe your pedantry is getting in the way of actual reality.

Maybe you'd like to guarantee that this analysis is correct? We could each play $10,000 in an escrow account, have a panel of legal experts analyze the situation, and if they are unable to guarantee that the president can make that guarantee, then I get the money.

Or is it the case that you can't guarantee that the president can make that guarantee?

 
At 7:53 PM, July 22, 2011, Anonymous David Tomlin said...

Mark Scarberry, thanks for the op-ed.

What if Obama agrees with Saving's understanding of Helvering, and acts accordingly? Who would have standing to challenge?

 
At 12:21 AM, July 23, 2011, Anonymous SheetWise said...

The government has already proclaimed that these "special bonds" are "savings" -- a little trick that allowed them to both spend and save the same money. Unless they were lying to us, there is no need to raise the debt limit to spend our savings.

 
At 4:29 AM, July 23, 2011, Blogger David Friedman said...

"or the administration intends to spend the money on something else."

That raises an interesting possibility for evading the debt ceiling.

The government takes all of the income from Social Security,say 100 billion, spends it on (say) the war in Afghanistan, then "redeems" 100 billion of the trust fund, uses that to pay Social Security recipients. It is now 100 billion below the debt limit, no? So can borrow another $100 billion.

Am I missing something?

 
At 7:39 PM, July 23, 2011, Anonymous Andrew said...

Yawn.

People who tell things like they are, people tell the truth, are summarily disposed, like Prof. Elizabeth Warren.

In Washington, you do not survive as someone who looks out for consumers. You do not survive as someone who opposes special interests. You do not survive as someone who tells the truth.

 
At 1:27 PM, July 24, 2011, Anonymous David Tomlin said...

Would the scheme be a worse PR problem than delaying SS payments, as Obama has already threatened?

 
At 8:16 AM, July 25, 2011, Anonymous Daniel D said...

@ David Friedman

"The government takes all of the income from Social Security,say 100 billion, spends it on (say) the war in Afghanistan, then "redeems" 100 billion of the trust fund, uses that to pay Social Security recipients. It is now 100 billion below the debt limit, no? So can borrow another $100 billion.

Am I missing something?"

The total Federal debt outstanding = bonds held by public (incl. the Fed) + bonds held by US Federal Agencies (e.g. the SS trust fund).

When the US Treasury redeems $100 billion in treasury bonds from the SS trust fund, it will then issue bonds to the public to bring in cash. The debt outstanding then stays the same. There are $100 billion less in the trust fund and $100 billion more in the public's hands. No debt ceiling change required.

 
At 10:04 AM, July 25, 2011, Anonymous Daniel D said...

On second thought, I don't know if the government can draw on the Trust fund in the situation David described (4 posts above).

If payroll tax revenue is applied to SS first, then it would not be possible for the government to fund the $100 billion for the War in Afghanistan.

Anyone know the answer to this?

 
At 2:14 PM, July 26, 2011, Anonymous Anonymous said...

I don't know the intricacies of the federal government, however, every member of Congress should watch the movie "Dave". Denying citizens of social security is nothing short of criminal. The government should first look to the people who have contributed significantly to their retirement. Now that the baby boomers are going to start cashing in on what is rightfully theirs, the government is going to default and cry poor mouth. The govenment seems to have enough money for everything except what really matters to the people. "Governemnt of the people, for the people, and by the people."

 
At 7:50 PM, July 28, 2011, OpenID hudebnik said...

"The Treasury is required by law to redeem bonds presented to it by the Social Security trust fund."

But the Treasury is require by law to do lots of things, such as pay employees their agreed-upon salaries, and pay Medicare providers at agreed-upon rates, and pay contractors their agreed-upon fees. It will be unable to do all of these things if it runs out of money. Does Federal law specify which of these obligations takes priority?

 
At 6:53 AM, October 11, 2013, Anonymous Cole Gentles said...

"People who tell things like they are, people tell the truth, are summarily disposed, like Prof. Elizabeth Warren."

Err.... Elizabeth Warren tells things like they are and tells the truth?!

What are you smoking?

 

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