There is a very real possibility that the government will stop issuing Social Security payments after the debt limit is hit.
As daunting as the prospect is, the alternative could be even worse: A little-known provision of a 1996 law could be interpreted to allow the Social Security trust fund to be used not only to pay Social Security’s monthly checks, but also to bypass debt limits and wages all the government’s otherwise overdue bills.
If that happens, any short-term relief for Social Security recipients will come with a potentially huge long-term price tag: The Social Security fund could be depleted much sooner than expected — in just a few years, in fact.
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These dire possibilities emerge from an analysis by Steve Robinson, chief economist for The Concord Coalition, a group that describes itself as “a nonpartisan organization dedicated to educating the public and finding common sense solutions to our nation’s fiscal challenges.”
An issue statement he wrote, titled “Social Security’s Debt Limit Escape Clause,” is available on the group’s website.
Let me hasten to add that Robinson is not in favor of the Social Security fund being used in this way. In an interview, he emphasized instead that he wrote his problem statement because we need to be aware not only that this “escape clause” exists, but that using it can have unintended consequences. Although hardly anyone outside Washington knows it even exists, and relatively few on Capitol Hill, the Treasury Department and the Social Security Administration are keenly aware of it.
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Before reviewing the details of this escape clause, it is worth focusing on the political dynamics surrounding it. Because the escape clause reduces pressure on Congress and the president to come up with a solution to the debt crisis, neither side has an incentive to publicize its existence. But if the government is otherwise pushed to the edge of the fiscal cliff, and it faces the potentially huge consequences of an outright default (including failure to pay monthly Social Security checks), the political pressure to use the escape clause could be intense.
The 1996 law creating the escape clause was passed in the wake of the government hitting its debt ceiling in 1995 and 1996. Ironically, the intent of that law was to prevent the social security fund from being used for anything other than paying social benefits. But, Robinson explains, it’s useless in the real world. That’s because Social Security checks are sent out of the Treasury’s general account, and if that account is in default, the checks would bounce.
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If and when the debt limit is hit, the only way – in practice – for Social Security checks to continue to be issued and cleared through the banking system will be for the Social Security Fund to “loan” the Treasury sufficient funds to enable it to pay all the government’s unfulfilled obligations. (I put “loan” in quotes because that’s not exactly how it works; the key is that the “loan” can be structured in ways that don’t count toward the debt limit. If you’re interested in reading more about the complex logistics involved , you should read Robinson’s issue card.)
Therefore, if the debt limit is hit, which it is expected to do as early as June, Congress and the president will be at the horns of a major dilemma:
- Do they allow Social Security checks to continue to be paid and risk the political fallout of being accused of “raiding” the Social Security trust fund?
- Or do they stop issuing Social Security payments and risk the political fallout of not issuing Social Security payments on which the very livelihoods of many elderly people currently depend?
You can understand why Congress and the President don’t want us to know this escape clause exists. Once we realize that, they are put in a no-win situation.
So fasten your seat belts for a wild ride in the coming months as both parties play political brinkmanship over the debt ceiling and, by extension, Social Security. With both sides hardening their positions every day, there is a very real possibility that the debt limit will be hit.
If that happens, we will hear a lot more about the little-known provision of a nearly 30-year-old law.
Mark Hulbert is a regular contributor to MarketWatch. Hans Hulbert Ratings tracks investment newsletters that pay a flat fee to be reviewed. He can be reached at mark@hulbertratings.com.