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The Real Reason Hitting The Debt Limit May Mean Social Security Checks Stop

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By Aaron Krowne
Founder, ML-Implode.com

It’s crunch time, and now we’re hearing as part of the hyper-political debt ceiling debate that that Social Security checks may stop.

But interestingly, we’re not just hearing that from Congressional Republicans: Obama has raised that spectre as well.

Many left-leaning critics are shocked, believing Social Security to be… well… secure, and are incensed that Obama would be willing to slaughter this sacred cow.  After all, if in the case of default, the government can prioritize payments to various areas, why would Social Security be among the first?  Talk about giving Main Street the finger!

Well folks, this one may not be about politics: there is a good legal and economic reason Social Security is put in jeopardy by hitting the debt limit.

As I’ve been ringing the alarm bell about for years (here’s a relatively-recent example), Social Security already has a funding problem, as it has gone “cash flow negative”.  The program is supposed to be self-funding (from payroll deductions), but that only holds so long as current benefits do not exceed the total revenue from payrolls.

Now, “liberal” econo-bloggers and pundits will always at this point say “that doesn’t matter, Social Security has a big trust fund”.  But it doesn’t.  You see, all it has are IOUs from the federal government.  These aren’t even Treasury securities that could simply be sold at market — they are bookkeeping entries.   This is because the  government long ago “restructured” Social Security, taking the accumulated and current savings and spending it on the usual guns-and-butter, leaving the Social Security Trust (and apparently most inside-the-beltway types and pundits) with a bunch of IOUs and warm fuzzies inside.

Technically, these bookkeeping entries are just the federal government keeping track of how much money it is “supposed to” re-allocate to Social Security expenditures… at a later date.  Uhm-hmm.  It’s exactly like that scene from “Dumb And Dumber”, where Harry and Lloyd have spent nearly $1 million in found money on frivolities, but dutifully replaced each dollar with an “IOU”.  They happily present the suitcase full of IOU “Post-It” notes to the rightful owners of the cash when they finally meet them.

That’s Social Security.  And to make up for that lack of true savings, the government has (for the past year) quietly been borrowing additional amounts each month to pay SS benefits, in essence, voluntarily exchanging the IOUs for Treasuries (which are immediately both borrowed and sold to pay out benefits).

So now we have this progression of disturbing facts:

1) Social Security is dependent on ongoing borrowing to meet current obligations at the 100% level.

2) Social Security “trust fund” obligations are just intra-governmental IOUs.

3) The government has no external obligation to pay anything back on these IOUs.

4) The government is about to stop being able to borrow.

5) All US Treasury obligations are “senior” to these intra-governmental IOUs (the Treasury obligations are “external” and legal; the internal obligations are internal and extra-legal, or at least of flexible legality).   Most notably: no US default is triggered if SS payments are violated, and doing so would help conserve cash to pay down actual, legal Treasury obligations.

CONCLUSION: The FIRST thing the government will HAVE to default on when it hits the debt ceiling is Social Security!  This doesn’t mean every single check will stop, but SS will no longer be able to pay out anything above its current revenue, which means there will be some shortfall in benefits.

Further, it is difficult to see how the government could just selectively pay some SS benefits but not others, so the most likely course will be that everyone will get a monthly SS check that has some “haircut,” by some unknown amount (my guess is not more than 5%, though this percentage would naturally go up as time goes on).

Have you heard people in Congress raising the 14th Amendment “debt shall not be questioned” clause, as if it provides some sort of legal protection in the event of default? Well, even if it did, it clearly doesn’t apply to the Social Security “debt,” because those are just internal government bookeeping entries (as discussed above). No debt has ever been issued for this “trust fund”!

This appears to be the “dirty little secret” Obama is acknowledging by raising alarm bells about Social Security payments.

It would all be amusing if it weren’t so sad, for so many people on fixed incomes that are already being absolutely KILLED by the lack of returns on their savings (thank you Ben Bernanke!)

I imagine some debt deal will be reached before the events above transpire, because acknowledging the true reality of the government’s finances would probably be too painful for the political establishment.  Aside from raising the ire of millions of voting pensioners, haircuts on Social Security checks would show in the bright light of day that Social Security is at its core a scam, not only from the outset, but also when it was “reformed” in the 80s.    Frankly, our government has reached the point where it cannot pay even the most meagre of promised benefits to retirees (and the vast majority of them are really going to need that money.)

More than anything, this would show the federal government simply is not omnipotent as has been assumed since the Great Depression; it has just been coasting for decades on raw dollar imperialism, and then when that ran out, a series of macro-financial scams to keep the status quo going and politicians in their cozy dynastic tenures.

See why (in all probability) Bernanke is already hinting about further quantitative easing?

There Are 11 Responses So Far. »

  1. I always believed there would be no social security when I retired, but to believe that my parents might loose theirs? Wow, things are even worse than we can imagine.

  2. I was an investment banker. One thing an IB does is “play” with the issue of seniority. The goal is/was to make Subordinated debt senior to Senior debt. How could that be possible? Easy.

    If one structures a balance sheet with senior debt with a ten year maturity and subordinated debt with an eight year maturity which one is actually senior? The Sub debt gets paid first. So, by right of repayment, it is functionally senior.

    My point, as of today the IOUs of SS have to ALL be repaid prior to 2036. Functionally, none of the other Treasury debt will be repaid (just rolled over). Therefore I conclude that the SS debts are senior.

    The only thing that can stop this is a default and a bankruptcy. At that point a judge looks and says this is senior and this is not.

    The only way we are going to resolve this is if there is a default. If not, SS will get “its” money. SS is Senior.

  3. Bruce -

    That’s definitely interesting, but none of the IOUs are external obligations, whereas Treasuries are. Thus, I have a hard time believing they would be upheld in lieu of Treasuries, at least between now and 2036.

    Also, I fail to see why they couldn’t simply be rolled-over sometime before they come “due” (or even when they come due), since that would just be a matter of an intra-governmental bureaucratic decision (another “restructuring” deal?).

    Anyway, it’s all probably besides the point: the “default” is more likely to come in the form of lying about the inflation rate or somesuch (the Obama admin even floated that idea) … again.

  4. To wit:

    “The 1960 US Supreme Court Case titled Flemming v. Nestor (363 U.S. 603) the Court ruled that they do not have any “earned rights” to any Social Security benefits, or any other government entitlement programme, as their perceived benefits were a “non-contractual interest.” The Court further declared, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.””

    I find it hard to envision SS payments or the “obligations” tied to them being honored (relative to external obligations) with that kind of precedent.

  5. What no one talks about is that SS was to be retirement. It was not to be for SSI, survivors or disability benefits. Take those out and put them under a separate heading. Pay retirement as was contracted for eons ago. Review disbility and SSI for fraud. Survivors is survivors.

  6. MC – yes, and it was set up with the retirement age at the average age of death at the time (62 if I recall correctly).

  7. In fact, S&P just finished WARNING the U.S. government that its CONTRACTUAL OBLIGATION to pay-out Social Security benefits is EQUALLY binding as its contractual obligation to pay interest to bond-parasites.

    It is pure “mythology” (started by the bankers and bond-parasites themselves) that bond debt is “senior” to any/all other contractual obligations.

    It is 100% IRRELEVANT what sort of “hierarchy” the bankers (and their political servants) WANT to establish regarding various categories of debt. In fact, the payment priorities will be decided on the basis of “contract law” principles – and there is no principle in contract law AWARDING “preferred status” to bond parasites over other forms of creditors.

    Once this FACT is more generally realized, it should be easier to IMPOSE “haircuts” on the bond-parasites – as that is the ONLY way to restore solvency to most Western economies.

  8. Jeff -

    While I agree with the need to keep up the payments, I don’t see there being any legal basis for seniority, even if the S&P or anyone else asserts it. But it certainly is interesting that S&P is saying that.

    In practice, Treasuries ARE senior to everything else, as evidence by the fact that the government has already unilaterally re-negotiated the terms of Social Security in its own favor numerous times (I would especially put manipulations of the inflation rate in that category).

  9. you could not be more wrong. Republicans have never threatened to stop paying social security. That was our Liar In Chief, you know the guy who thinks that ATM’s create unemployment and things “price earnings ratios” are “profit to earnings ratios” showing he is not even familiar with the vocabulary of investment.

    There is $80 billion in cash singificant income coming in. Military gets paid, social security gets paid. Obama is simply a fantastic liar or maybe you haven’t figured this out?

  10. [...] in the Zeros"};The money in the Social Security accounts are just bookkeeping entries. The government long ago “restructured” Social Security, taking the accumulated and current [...]

  11. “Republicans have never threatened to stop paying social security.”

    Where have you been for the past 40+ years?

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