In his Friday night press conference, for the second time, President Obama raised the specter that Social Security checks might not go out if Congress does not raise the debt ceiling. His words: “Well, when it comes to all the checks, not just Social Security — veterans, people with disabilities — about 70 million checks are sent out each month — if we default then we’re going to have to make adjustments. And I’m already consulting with Secretary Geithner in terms of what the consequences would be.” Earlier he said in an interview on CBS News: “I cannot guarantee that those [Social Security] checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”
He must not be consulting with his lawyers, because this attempt to scare Social Security recipients is without legal foundation.
The Social Security trust fund holds about $2.4 trillion in U.S. Treasury bonds, which its trustees are legally entitled to redeem whenever Social Security is running a current account deficit. Thus, if we reach the debt ceiling (which I continue to think is a remote prospect, even if less remote than it seemed a week ago), this is what will happen. The Social Security trust fund will go to Treasury and cash in some of its securities, using the proceeds to send checks to recipients. Each dollar of debt that is redeemed will lower the outstanding public debt by a dollar. That enables the Treasury to borrow another dollar, without violating the debt ceiling. The debt ceiling is not a prohibition on borrowing new money; it is a prohibition on increasing the total level of public indebtedness. If Social Security cashes in some of its bonds, the Treasury can borrow that same amount of money from someone else.
To be sure, a small portion of the money due from Treasury to the trust fund on the bonds is accrued interest. Payment of this portion will not have an effect on the debt ceiling, because the ceiling is calculated according to amount borrowed, not amount to be paid. That amount, however, is too trivial to affect the bottom line. Interest rates are low, and interest was last paid at the end of June.
President Obama is therefore wrong when he says that failure to raise the debt ceiling might result in not sending out Social Security checks. Many bad things might happen, but not that.