By Thomas R. Saving - The Wall Street Journal
The Social Security coffers are very far from running dry.
Last week President Obama made an alarming statement to the nations senior citizens. He told CBS Evening News anchor Scott Pelley he couldnt guarantee that $20 billion in Social Security checks will go out on Aug. 3 the day after the government would go into default if it doesnt raise the debt ceiling. There may simply not be the money in the coffers to do it Mr. Obama said.
This statement completely overlooks the existence of the Social Security Trust Fund. Moreover government redemption of the bonds in that trust fund does not breach the debt ceiling.
That doesnt mean that we dont have a problem. Failure to raise the debt limit by the end of this month will result in the government having to live within its means. That means the current level of expenditures would need to fall by about 25 immediately or an amount that came to $60 billion in May alone.
But let us imagine the unimaginable: No agreement is reached and the federal government must cut a quarter of its expenditures. Where will the reductions hit? Will we stop servicing the national debt? Not paying the interest due on the debt would result in significant punishment from international financial markets making the future cost of servicing the debt much greater.
Since such a move is highly unlikely the cuts must come from domestic government programs. An across-the-board cut of 25 in all government programs would do the trick but would wreak havoc on Medicaid and Medicare. Alternatively restoring appropriations to 2001 levels would also suffice.
But what about Social Security? Here are the facts. Social Security revenues come from a 12.4 payroll tax capped at $106800 which is split evenly between employers and employees.
In 1983 reforms were adopted that changed the systems tax-rate schedules and imposed an income tax on the Social Security benefits of higher-income individuals. As a result every year from 1984 through 2009 Social Security revenues exceeded payments to beneficiaries.
Congress spent these surpluses and the U.S. Treasury issued the Social Security Trust Fund special bonds which can be redeemed whenever the Social Security system has a current account deficit. In 2010 the Social Security system ran its first current account deficit since 1983 and for the first time since the reforms the deficit was covered by redeeming Trust Fund bonds.
By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration. And when the Treasury does total government debt subject to the debt limit falls by the amount of the redemptionthus freeing up the Treasurys ability to issue new bonds equal in amount to the redeemed Trust Fund bonds.
Therefore 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. Not at least until the $2.4 trillion Trust Fund is exhausted in 2038.
If issuing Social Security checks does nothing to immediately affect the debt limit how is it possible that Social Security would be at the top of the expenditure cut list?
The reason is simple and stems from the constitutional question that arose from a federal program in which all citizens were required to participate. In Helvering v. Davis (1937) the Supreme Court upheld Social Securitys constitutionality because The proceeds of both employee and employer taxes are to be paid into the Treasury like internal-revenue taxes generally and are not earmarked in any way.
As a result the federal government can apply the revenues collected from Social Security payroll taxes and the income taxes collected on benefits collected from higher-income individuals to any government liability.
So when the president says that thanks to the debt ceiling there may simply not be the money in the coffers to send out the $20 billion in August Social Security checks he either does not understand the way the system works or the administration intends to spend the money on something else.
Mr. Saving is director of the Private Enterprise Research Center at Texas A&M University and served two terms as a public trustee of the Social Security and Medicare Trust Funds. He is also a senior fellow with the National Center for Policy Analysis.
