Monday, October 07, 2013

"Better off" Social Security beneficiaries (and future recipients) could be cut off suddenly as part of GOP strategy to mitigate debt "default"; Is Trust Fund a "real creditor"?

If the debt ceiling is not raised and if indeed the federal government is not able to pay all bills on time starting in late October (or probably November 1), some current and future Social Security beneficiaries could lose their benefits forever, of have them reduced, based on immediate but permanent means testing. 
    
Here’s why it could happen.  I had covered this idea with a blog posting here on January 16, 2013, coordinated with a posting on January 15, 2013 on my  Issue blog, where I linked to a Wall Street Journal article by Rivkin and Casey.   That particular law firm argued that, according to the Constitution, only public debts must be paid.  That generally means interest (and principal, with caveat) on bonds owned by individuals, companies, organizations, and especially outside of the US (like China).  If the president must borrow under the 14th Amendment to pay these, he very likely has the power to do so.  The law firm argues that there is no constitutional duty to continue paying entitlements, even though they were promised.  Failing to pay them as promised so may sound grossly unethical or unfair, but the president (or Treasury) cannot pay them after running out of money without permission from Congress.  The courts are likely to concur with this position.  Continuing to pay entitlements, even those that had been promised, becomes a matter of political pressures, as do most issues.
  
But enriching this debate is the idea that Social Security is a bondholder.  Failure to pay the entire amount – the next big repayment to the Trust Fund is due Nov. 1 – technically constitutes default.  But the rest of the world looks at this as an internal matter.  Markets would not be affected by a default on the Trust Fund as it would on a default to China.  This sounds offensive, but it is true.  In fact, some parts of the world (most recently Russia) look at our entitlement mess as a sign of evasive, non-committal personal morals.
  
There is a good legal question as to whether the president has the authority, under the 14th Amendment, to reimburse the Trust Fund, without permission from Congress.   A couple of postings by law professors from California in the New York Times in January maintained that he would.  Medicare is even murkier, but it’s possible that similar arguments will be made.  Even if the Social Security Trust Fund is a legal bond holder, investors overseas could see it as a largely internal "funny money" matter.  The Wall Street Journal has already hinted at this idea when discussing past proposals (like Toomey's) to guarantee the liquidity necessary to pay off bondholders if the debt ceiling is exceeded.  

If in fact the administration cannot make its full repayment to the Social Security trust fund, Congress could move quickly to lighten the burden on Social Security by cutting off at least better off beneficiaries. (The House, of course, would have trouble getting the Senate to go along with this, Ted Cruz notwithstanding.)  The only ready-to-use tool available for emergency means testing would be income tax returns.   In the past, in my own life, I’ve met people who want to expropriate “inherited wealth”, but it would not be very easy for the federal government to base such a scheme on accumulated wealth, as opposed to income, very quickly. 
  
It’s important to remember that, according to Supreme Court rulings in the past (Flemming v. Nestor), social security recipients have no contractual “ownership rights” to future benefits based on FICA "contributions".  Legally, Congress can not only delay them (by upping retirement ages) but in a national emergency (even if self-inflicted) also cut them off  (for current and future beneficiaries).  Conservatives have actually used this reasoning to mitigate the effects of default, and often privately recommended that better-off Americans move their money overseas (as many of them do themselves).  On the other hand, George W. Bush’s neocons proposed privatization to protect legal ownership of benefits, as have libertarian think tanks like Cato.  It would be more in classical GOP spirit to propose accounting of the actuarial value of FICA “premiums” (taking out the startup and disability insurance component – ironically mandatory and uncontroversial) and guaranteeing them to all current and future beneficiaries, but immediately means-testing the rest.  
   
Back in the 1990’s, the now late Harry Browne of the Libertarian Party did warn that, for freedom, a generation of people would have to give up their social security benefits, a one time shock. I didn’t take it seriously then.
  
My next social security deposit occurs on Oct. 9. I’m even doing a withholding tax.  It could  be my last benefit check ever if this analysis is correct and the worst happens.  There is a silver lining of sorts, from corporate America’s old “playbook”.  That is, I took benefits early, at Age 62, starting in September 2005.  Were there to be a cutoff, I would have accumulated more than I could have if I had waited to full retirement age at 66-1/2.  And I could have wound up with zero had I waited until 70-1/2.  This sounds appalling, but legally I may have made the right choice.  I can recall after “retiring” from ING with a layoff, that HR and the outplacement companies recommended taking retirement early, to give people more time to work on what they wanted to do, and fend off pressure to get into less desirable jobs (that is, the hucksterism that is so common).  Companies built their pensions around the idea that employees take Social Security early and many defined benefit pension plans had Social Security offsets which were predicated on this strategy.  So people on pensions built this way get hit twice, but legally there could be nothing they can do.  It’s all “political”.  
  
Atlantic has an analysis by Matthew Brian that calls a potential debt default “a crisis if we’re lucky and historic calamity if we’re not” here.  But the worst of the calamity is long term, that the US becomes perceived as a cronyistic “banana republic” which is no longer safe enough for investment because moral failure of the people allowed them to be taken over by self-serving special interests. 
  
There is a hard edge within the “Tea Party” that opposes not only “Obamacare” but entitlements in general.  It maintains that care of the vulnerable belongs in families and communities and not with government at all.  It sounds incredible when you look at the fact that most of the western world uses public funding for a lot of healthcare, but conservatives are quick to point out that “demographic winter” is deep-sixing economies in Europe.  If we could go “cold turkey”, there might be a lot of personal sacrifice, but future generations would have it better.   Conservatives make the argument that we don’t care enough about future generations, particularly by not being willing to take on the “responsibility” of having enough children, but then they contradict themselves by denying global warming. As shocking as it sounds, this sort of thinking pervades Russia’s recent anti-gay laws.  (Michele Bachman and Valdimir Putin think a lot alike.)  This sort of thinking has profound meaning for how we perceive “family responsibility” and how much of it is separate from just choosing to have children. It certainly sets the granularity of individualism.  There was a New York Times article Oct. 5 that touched on this “natural family” idea by Jonathan Wiesman Oct. 5. 
     
It’s hard to see any radical GOP endgame that makes a lot of sense. It reminds me of a gambit-style attack in a chess game without followup, resulting in a lost position according to the normal rules.  I certainly feel like a pawn that the GOP feels it can sacrifice for its speculative takeover plans.  It claims new prosperity because America will just get rid of its debt by throwing less "self-sufficient" people off the cliff (all of it “constitutionally”), although if you do all the math, even this plan can't work for too long.  It can’t win a legitimate election this way.  But it could try to plot a fascist takeover.  


Update:

CNN Money has a story predicting that Social Security checks, starting November, could be cut 16% across the board, until the debt limit is increased (if ever).  Oh. I could stop the IRS withholding.  I won't owe much tax. Play Grover Norquist's game. 




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