Wednesday, January 16, 2013

Legal status of Social Security Trust Fund bond instruments might hold together for beneficiaries during debt crisis after all


I decided I should share the exact text of one of the replies to my question on the New York Times debate on the debt ceiling (link yesterday):, authored by P. Quincy, California.

“The money for Social Security payments IS there: in addition to FICA revenue that continues to come in, which coves the vast majority if current expenses, Social Security holds a large amount in Treasury bonds. Those bonds are as valid and binding as any held by investors, foreign nations, or anyone else. They, like all Treasury bonds, are guaranteed by the 'full faith and credit' of the United States: failing to redeem them on demand when the SSA requests redemptions would constitute default, just like failing to pay interest and to redeem bonds held by anyone else. 

“Social Security, like interest on Treasury bonds, and redemptions of maturing Treasury bonds, must be payed first out of any available funds during a debt ceiling conflict. And of course, changes to Social Security now will not affect the debt ceiling for decades, and are thus utterly irrelevant to the discussion here.”
  
That would seem to contradict what Dr. Tribe said.  The Treasury cannot fail to reimburse the Social Security Trust Fund on time without being in legal default (presumably in violation of the 14th Amendment).  That reimbursement comprises interest payments and redemption of principles on scheduled due dates (which  probably correspond to disbursements).
  
Congress can, of course, reduce benefit payments with new legislation (Flemming v. Nestor), or even means test – but that would not affect the “default” event.  It would seem, then, there is no immediate reason for Congress to do so, if Quincy is right.

The Rivkin and Casey piece in the Wall Street Journal Monday (“The Myth of Government Default”, linked yesterday on the “Issues blog”)  says that Congress has no constitutional duty to borrow to pay for entitlements, because it can simply cut them off.  That would sound like an existential danger to the lives of many seniors.  However, it does appear that Congress may well have a constitutional duty to “borrow” (if necessary) to pay bondholders, and the Social Security Trust Fund is a bondholder.  That would appear, for the most part, to answer the scary points in the Rivkin piece, at least for thus go-round.  Most accounts of the Treasury’s cash flow confirm the fact that Treasury still would have the money to pay all bond obligations (implying it can pay Social Security).

There would indeed exist some due bills (salaries or wages for work already one or goods and services already purchased and used) when the debt ceiling crashes.  That would certainly cause chaos, although not directly with retirees.  Furthermore -- and this is the "future spending" decapitation that hardliners want -- most contracts would be suspended, and most contractors and federal workers would be laid off or furloughed, causing massive, if short-term, unemployment and disruptions, and sacrifice in order to go (as some ideological Republicans see it) go “cold turkey”.  The ethics of uneven sacrifice should not go unnoticed. 

One other technical note: the "IOU" mechanism would not seem to apply to Social Security.  The Treasury can give the SSA an "IOU" and the SSA could theoretically give one to a beneficiary (maybe), but the Treasury cannot directly supply a beneficiary with an IOU, because of the trust fund mechanism.  And, given what I noted before about the IOU proposal, that sounds for the best. 


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