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

Aaron Krowne is the Founder of ML-Implode.com. Read the full article here.

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?

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