The Debt Ceiling Debate: An Update to Advocator's Analysis
by Sean P. Sullivan
Just last week, The Advocator Group released an analysis of the impact of the debt ceiling impasse on the timely payment of Social Security benefits. The analysis highlighted the inner workings of the Social Security Trust Funds, including how funds are invested and redeemed for cash that is used to pay benefits.
Based on information gathered from Social Security's Office of the Chief Actuary, as well as the United States Department of the Treasury, the article explained that "in order for the special issues to be redeemed for cash, they must be purchased by the U.S. Treasury. Then, the U.S. Treasury can sell the bonds to the public. However, if the debt ceiling is not raised, the U.S. Treasury will not have sufficient funds to purchase the bonds from Social Security in the first place, meaning the bonds could not be turned into cash and used to make monthly payments to beneficiaries."
Over the past week, there has been no shortage of media coverage concerning the debt ceiling impasse, and much of the commentary has been inconsistent and conflicting. For instance, a Wall Street Journal article (Thomas R. Saving, Obama's Debt-Ceiling Scare Tactics, Wall Street Journal, July 22, 2011) indicated that the bonds held by Social Security "can be redeemed whenever the Social Security system has a current account deficit," that when the Treasury redeems the bonds, "total government debt subject to the debt limit falls by the amount of the redemption," and that "...meeting Social Security obligations in August, September and all future months in this fashion would add nothing to the gross government debt subject to the debt limit."
Later, a New York Times article (Binyamin Applebaum, U.S. May Have Way to Cover Bills After Deadline, For Week, New York Times, July 26, 2011) suggests that the problem is being overstated for a different reason, stating that "[t]hanks to an inflow of tax payments and maneuvering by the Treasury Department, the government can probably continue to pay all of its bills for several days after Aug. 2..." The article attributes this to estimates by "several Wall Street banks and a Washington research organization." Despite the Obama administration's opposing opinion (and subsequent restatement of that opinion), the article maintains that although the government will exhaust its ability to borrow money on August 2, "there will still be cash left in the federal wallet" to make payments, including Social Security payments, until August 10.
According to contacts we have spoken to within the Social Security Administration (SSA), there has been no formal communication on the issue within SSA and it has not been addressed by the Commissioner. Of note, April's potential government shutdown also was not addressed within the administration until the final hours. However, there appears to be a strong legal argument that the cash invested in bonds must be paid back to SSA for payment of benefits on August 3, and that this would not impact the debt ceiling. Supplemental Security Income (SSI) checks, on the other hand, are paid out of a different funding mechanism, and could be impacted greatly by a failure to increase the debt limit by August 2.
If, in fact, there is enough "cash left in the federal wallet" to issue payments through August 10, a portion of Social Security beneficiaries will actually receive their August payments before funds are depleted. Social Security payments are issued on Wednesdays throughout each month, based on the birthdates of beneficiaries. Those beneficiaries who have been receiving benefits since 1997 or prior, as well as those who receive both Social Security benefits and SSI receive benefits earlier in the month. In August, they are slated to receive their payments on the 3rd. Additionally, Social Security payments are issued in arrears, meaning that any August payments are actually covering benefits payable for the month of July. While this minor point is of little significance to beneficiaries, it is of tremendous consequence to disability insurers attempting to address policies impacting Social Security offsets.
In the midst of the conflicting coverage, a Department of the Treasury publication entitled "Debt Limit: Myth v. Fact" states that "[i]f Congress fails to increase the debt limit, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits..."
While many still view a default or delay to Social Security payments as an unlikely scenario, at this late stage any resolution will be an eleventh hour compromise unless the parties agree to an extension. Given the conflicting analysis and sweeping impact, it is critical that all affected parties consider all potential outcomes.