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The government may stop issuing Social Security payments after the debt limit is hit — here’s why

An obscure provision of a 1996 law makes the Social Security trust fund vulnerable

How Social Security’s trust fund might be used to get around the debt limit.

There’s a very real possibility the government will stop issuing Social Security payments after the debt limit is hit.

Scary as that prospect is, however, the alternative might be even worse: A little-known provision of a 1996 law could be interpreted to allow the Social Security trust fund to be used not only to pay Social Security’s monthly checks but also to circumvent the debt limit and pay all the government’s otherwise overdue bills.

If that happens, any short-term relief to Social Security recipients would come with a potentially huge long-term price tag: The Social Security trust fund could be exhausted much sooner than currently projected—in just a couple of years, in fact.

These dire possibilities emerge from an analysis conducted by Steve Robinson, the chief economist for The Concord Coalition, a group that describes itself as “a nonpartisan organization dedicated to educating the public and finding common sense solutions to our nation’s fiscal policy challenges.”

An issue brief he wrote, entitled “Social Security’s Debt Limit Escape Clause,” is available on the group’s website.

Let me hasten to add that Robinson is not advocating that the Social Security trust fund be used in this way. In an interview, he instead stressed that he wrote his issue brief because we need to be aware not only that this “escape clause” exists but that its use could have unintended consequences. Though hardly anyone outside Washington knows that it even exists, and relatively few on Capitol Hill, the Treasury Department and the Social Security Administration are very much aware of it.

Before reviewing the details of this escape clause, it’s worth focusing on the political dynamics that surround it. Because the escape clause lessens the pressure on Congress and the president to come up with a solution to the debt crisis, neither side has an incentive to publicize its existence. But if the government is otherwise pushed to the edge of the fiscal cliff, and it’s facing the potentially huge consequences of an outright default (including the nonpayment of monthly Social Security checks), the political pressure to use the escape clause could be intense.

The 1996 law that creates the escape clause was passed in the wake of the government hitting its debt limit in 1995 and 1996. Ironically, the intent of that law was to prevent the Social Security trust fund from being used for anything other than paying Social Security benefits. But, Robinson explains, that’s unworkable in the real world. That’s because Social Security checks are sent out by the Treasury’s general account, and if that account is in default the checks would bounce.

If and when the debt limit is hit, therefore, the only way—in practice—for Social Security checks to continue being issued and cleared through the banking system would be for the Social Security trust fund to “lend” the Treasury sufficient funds that it could pay all the government’s unmet obligations. (I put “lend” in quotes because that’s not exactly how it works; the key is that the “loan” can be structured in ways that don’t count against the debt limit. If you’re interested in reading more about the complex logistics involved, you should read Robinson’s issue brief.)

Therefore, if the debt limit is hit, which it is projected to do perhaps as early as June, Congress and the president will be on the horns of a huge dilemma:

  • Do they allow Social Security checks to continue getting paid, risking the political fallout of being accused of “raiding” the Social Security trust fund?
  • Or do they stop issuing Social Security payments, risking the political fallout of not issuing Social Security payments, on whom the very livelihoods of many elderly currently depend?

You can appreciate why Congress and the president don’t want us to know that this escape clause exists. Once we are aware of it, they are put in a no-win situation.

So fasten your seat belts for a wild ride in coming months as both parties play political brinkmanship over the debt limit and, by extension, Social Security. With both sides by the day hardening their stances, there’s a very real possibility that the debt limit will be hit.

If that happens, we’ll be hearing a lot more about the little-known provision of a nearly 30-year-old law.

[Social Security payments may stop after the debt limit is hit -- here's why - MarketWatch]