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Disentangling Social Security From the Debt Ceiling

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Social Security appears to be a key bargaining chip in the struggle over the debt limit. President Obama may have played smart politics when he threatened that, if the debt limit is not raised, Social Security checks might not go out on time. But he was needlessly scaring the program's fifty-five million beneficiaries, the vast majority of whom are highly dependent on each month's Social Security check. So was Speaker John Boehner who, in a recent interview, also spoke of the possible interruption of benefits.

The truth is that checks can go out, in their full amount, without adding a penny to the federal government's total debt. They can be paid without subtracting more than a tiny fraction of a percent -- if anything -- from the funds currently being used for other government purposes -- a reduction so small that it could be considered a rounding error. 
     
Three key facts make this true. First, Social Security has its own dedicated income stream for payment of benefits and associated administrative costs. Second, in addition to its current income, Social Security has an accumulated reserve of $2.7 trillion in its trust funds. That reserve is invested, as Congress has always required, in what has been the safest investment on Earth -- treasury bonds backed by the full faith and credit of the United States. And third, the $2.7 trillion in treasury bonds held in the trust funds is included in the $14.3 trillion total debt that has reached the statutory limit.

If the debt limit is not raised, Social Security's Board of Trustees could and should exercise its right to redeem (cash in) as many of Social Security's bonds as needed to pay benefits. Every dollar of principal (though not accrued interest) that the federal government would be required to pay to redeem the bonds would reduce the total debt subject to the $14.3 trillion limit. That would make room under the debt ceiling and allow the government to borrow an additional dollar from the public to replace every dollar of principal paid by the government.

That set of transactions would not violate the statutory debt limit, because the total amount of federal debt would remain exactly the same before and after. It would ensure that all benefits are paid in full and on time. And it would not reduce the funds available to the government for its other operations in any meaningful way. (Any accrued interest paid on redeemed bonds would be small, because it is normally paid semi-annually and was just paid to Social Security on June 30.)

What the president and the speaker do not seem to understand is that Social Security is a real pension program backed by very substantial and real assets. The law requires employers to establish trusts for the assets of their private pension plans. Similarly, the Social Security trust funds exist to protect American workers and their families, and to make sure that benefits are paid in the amounts required by statute. Social Security's trust fund reserves should be used to ensure that all benefits are paid in full and on time to workers and their families who have earned them: retired workers and their families, workers who have become disabled (including the many veterans seriously wounded in the Iraq and Afghanistan wars) and their families, as well as the children and spouses of workers who have died prematurely (including the 9/11 families).

Because the federal government is the plan sponsor, the president should be especially careful to act as a fiduciary. That means ensuring that all plan income and assets are carefully accounted for and used for their intended purpose. It certainly means doing everything possible to ensure that all beneficiaries receive their scheduled benefits on time and in full.

The only threat that benefits will not be paid, in addition to the threat that the United States might default with respect to all creditors, is if the Managing Trustee, who happens to be the Secretary of the Treasury, Timothy Geithner, refuses to exercise Social Security's right to redeem the bonds. Any technical difficulties in doing so can be resolved, if there is a will to do so.

In a recent press conference, the president stated that he wants Social Security to be part of a grand debt-limit bargain, because he wants to "strengthen" it. We suggest that he first maintain it, allow it to pay all promised benefits (independent of what happens to the debt limit), and stop using it to scare the American people.

Nancy J. Altman co-chairs the Strengthen Social Security campaign, which consists of over 300 national and state organizations. She is the author of "The Battle for Social Security: From FDR's Vision to Bush's Gamble."

Mark S. Scarberry is a professor of law at Pepperdine University School of Law. He teaches and writes in the areas of bankruptcy law and constitutional law. Some of Scarberry's recent publications are available on his Social Science Research Network author page at http://ssrn.com/author=48574.