Social Security Can Be Paid During a Default, But the Decision Will Be Political

President Barack Obama warned last week that Social Security benefits might not go out "ontime" if Congress does not raise the debt ceiling. Cooler heads in Washington disagreed with the President, saying that seniors and disabled Americans receiving disability payments through Social Security should not be worried about their benefits if the US government runs out of borrowing capacity later this month. Is there an answer to this question? The answer is that Social Security recipients should worry ONLY if the Obama administration insists on making Social Security a pawn in the debt ceiling battle, which would be a political ploy unworthy of an American President. Social Security is a stand-alone program with its own dedicated revenue stream that works as follows : workers and employers pay a combined 12.4% of employees' payroll. It was designed to be a "pay as you go" program, with taxes on today's workers funding current payouts to already retired and disabled workers and their dependents. Social Security funds can't be used for anything except Social Security 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 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 US Treasury is used to fund general non-Social Security operations. The Treasury then issues special interest-bearing Treasury bonds to the SSTF matching the amount of payroll taxes it has received and spent. So, 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 funding system is the basic objection of critiques of Social Security - that it's a Ponzi scheme that has no real assets. This is not true. The reality is that the SSTF actually is one of the largest creditors of the US 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 safest instrument: paper issued by the US Treasury. The special-issue Treasury notes are backed by the full faith and credit of the US government, and the system works well 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. 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 for the Treasury to borrow more from the general public to fund Social Security redemptions. The total amount of federal debt would not change, and the redemptions wouldn't reduce funds available for other government operations. BUT, Social Security's managing trustee is the US Treasury Secretary, now Jacob Lew, so he actually has conflicting obligations - to serve the President and to protect the rights of Social Security beneficiaries. The same conflict of interest exists for the three other top government officials who serve as trustees - the secretaries of Health and Human Services and the Labor Department and the commissioner of the Social Security Administration. ~~~~~ Dear readers, frightening seniors and disabled people might seem to be a good political tactic, considering the huge stakes in the debt ceiling battle. But 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% 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." While it is beginning to look like the President and Congress will find a way to avert a default, at least temporarily, if the negotiations fail, all Social Security recipients should begin to contact the President, their Congressperson and Senator, as well as Treasury Secretary Lew, to demand that Social Security be treated as intended and kept out of Washington political battles.