Although the recent congressional action to increase the debt ceiling is good, the problem is anticipated to resurface in early December.
Treasury Secretary Janet Yellen outlined some of the potential repercussions of failing to increase the debt ceiling. “Nearly 50 million seniors might stop getting Social Security benefits or receive them delayed” if the Treasury could no longer borrow and its cash position was insufficient for the government to fulfill its debts, Yellen said.
When the Treasury declared that it didn’t have enough cash to pay March benefits during the 1996 debt ceiling crisis, Congress enabled Treasury to issue enough debt to cover the payments by not counting the borrowings against the debt limit.
It’s a fallacy to believe that Social Security has its own funding source and therefore would not be affected by the debt limit.
Even though payroll taxes and the taxation of Social Security payments under the federal income tax brought in enough money each year to meet promised payouts, Social Security’s finances are inextricably linked to Treasury transactions.
Social Security revenues are deposited to the Social Security trust fund in the form of short-term, nonmarketable Treasury securities known as certificates of indebtedness (CIs) under regular processes. The revenues remain in the General Fund, which the Treasury uses to distribute monthly payments. Treasury redeems some of the CIs when it pays the benefits. Social Security payouts might be delayed if the Treasury does not have enough cash on hand and is unable to issue new debt due to the debt ceiling.
Furthermore, as you may be aware, Social Security now has a financial shortfall each year.
Interest on the trust fund and, as of this year, drawing down trust fund assets are presently filling the gap between income and outlays. If the Treasury runs out of funds and hits the debt ceiling, it won’t be able to pay the interest on the trust fund’s special issue obligations, nor will it be able to redeem them.
Yes, the Social Security trust fund has the cash, or access to cash via borrowing, to cover all benefit payments through 2034. But making those payments on schedule requires the Treasury to have the funds, or access to cash through borrowing, to make those payments from the General Fund. Benefits will not be paid on schedule if the debt ceiling restricts Treasury from issuing additional debt to manage its cash flow or redeem trust fund assets.
Most of the technical details will likely be irrelevant. No member of Congress wants to be blamed for millions of individuals missing out on their Social Security benefits. As a result, even if all hell breaks loose, Congress will almost certainly pass legislation to ensure that Social Security checks are issued on time.