There is a very real possibility that the government will stop issuing Social Security payments once the debt limit is reached.
However, as frightening as that 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 just to pay checks monthly social security payments, but also to circumvent the debt limit and reimbursement all otherwise overdue government bills.
If that happened, any short-term relief for Social Security beneficiaries would come with a potentially huge long-term price: the Social Security trust fund could be depleted much sooner than currently expected, in just a few years, in fact.
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These dire possibilities emerge from an analysis led by Steve Robinson, the chief economist of The Concord Coalition, a group that describes itself as “a non-partisan organization dedicated to educating the public and finding common sense solutions. to the challenges of our country’s fiscal policy”.
A briefing note he authored, titled “The Social Security Debt Limit Escape Clause,” is available on the group’s website.
Let me hasten to add that Robinson is not advocating that the Social Security trust fund be used in this way. In an interview, he instead pointed out that he wrote his briefing because we need to be aware not only that this “escape clause” exists, but that using it could have unintended consequences. Although hardly anyone outside of Washington even knows it 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 lessens the pressure on Congress and the president to find a solution to the debt crisis, neither side has an interest in publicizing its existence. But if the government is otherwise pushed to the edge of the fiscal cliff and faces the potentially huge consequences of outright default (including non-payment of monthly Social Security checks), the political pressure to use the escape clause could be intense.
The 1996 law that creates the escape clause was passed after the government reached its debt ceiling in 1995 and 1996. Ironically, the intention of this law was to prevent the Social Security Trust Fund from being used for anything other than the payment of Social Security benefits. But, explains Robinson, this is unachievable in the real world. This is because Social Security checks are sent through the general Treasury account, and if that account defaults, the checks will bounce.
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If and when the debt limit is reached, therefore, the only way – in practice – for Social Security checks to continue to be issued and cleared by the banking system would be for the Social Security Trust Fund” lends” sufficient funds to the Treasury so that it could pay all unfulfilled government obligations. (I put “loan” in quotes because that’s not exactly how it works; the key is that the “loan” can be structured so that it doesn’t count against the debt limit If you want to know more about the logistical complex involved, you should read Robinson’s briefing note.)
Therefore, if the debt ceiling is reached, which it is expected to do perhaps as early as June, Congress and the President will be faced with a huge dilemma:
- Do they allow Social Security checks to continue to be paid, risking the political fallout of being accused of “looting” the Social Security trust fund?
- Or do they stop issuing Social Security payments, risking the political fallout of not issuing Social Security payments, on which the livelihoods of many older people currently depend?
You can understand why Congress and the President don’t want us to know that this escape clause exists. Once we are aware of this, they are put in a no-win situation.
So buckle up your seat belts for a wild ride in the coming months as both sides play tightrope politics over the debt ceiling and, by extension, Social Security. As both sides harden their positions daily, there is a very real possibility that the debt limit will be reached.
If that happens, we’ll hear a lot more about the little-known provision of a nearly 30-year-old law.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at firstname.lastname@example.org.