5 questions about Social Security and the debt ceiling

July 19, 2011

Social Security is a pawn in the negotiations to avoid a federal debt default, and that has stirred fear and confusion among current and future beneficiaries. President Obama has threatened not to make August benefit payments in the event of a default, and signaled that he is open to cutting Social Security if it helps him secure a big deficit-reduction deal with Republicans.

Let’s look at where Social Security stands on the D.C. chessboard:

Should I be worried that I won’t receive my Social Security benefit in August?

President Obama stated recently that he “cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”

On its own, Social Security’s coffers are full enough to make the August payments. Social Security is cash flow positive – it generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.

Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.

Here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.

Social Security advocates don’t agree on what might happen.

“[Obama’s statement] was a foolish bluff,” says Eric Kingson, co-director of the Strengthen Social Security coalition. “There’s no excuse for checks not being issued, and the White House’s willingness to use the threat is symptomatic of their lack of regard for the institution. Their willingness to use it as a negotiating chip is unfortunate.”

But Max Richtman, acting CEO of the National Committee to Preserve Social Security and Medicare, worries that the government might decide not to fund the interest on Social Security’s bonds, which would leave the program short of funds.

“We really don’t know — it’s completely uncharted territory. Social Security is cash flow positive if you count interest on the bonds. But which obligations will the government put at top of list of priorities, and who decides that? Is it paying the interest on those bonds? Will it be paying the military? There’s so much uncertainty as to who gets paid, how much and when.”

What does the President mean when he talks about cutting benefits? Is the government cutting my benefits in August?

It’s important to separate discussion about August payments from the longer-term discussion of possible Social Security reforms. President Obama has signaled that he is willing to throw Social Security into the debt ceiling negotiations if it helps him win a big deficit reduction deal that includes new taxes – even though Social Security has no direct impact on the deficit.

Specifically, the White House appears open to benefit cuts via adoption of a new cost-of-living-adjustment (COLA) formula called the “chained CPI,” and to higher retirement ages. Both would be benefit cuts; the big difference is that a revised COLA would impact current beneficiaries, while a higher retirement age would impact future benefit recipients.

But those changes would be phased in over time, and wouldn’t affect August benefit payments.

Is the President now willing to break previous promises not to cut Social Security benefits?

Yes. As a candidate, Mr. Obama promised specifically not to raise the retirement age or to reduce COLAs.

And, in his State of the Union message this year, he said:

“We must [strengthen Social Security] without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.”

Again – adopting a chained CPI would reduce benefits for current beneficiaries. With compounding, it’s a loss of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of eligibility), according to the National Academy of Social Insurance.

If I already get Social Security benefits, am I grandfathered in if the program is cut?

Not necessarily. You’d be protected against benefit cuts tied to a higher retirement age, because you’ve already made your age election. But a chained CPI would impact your COLAs over time.

What if I just filed for benefits, or plan to file next month? Could I lose my benefits in the event of a government default?

No, but processing of your application could be delayed if the Social Security Administration is forced to lay off employees or shut down in the event of a government funding crisis.

4 comments

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[…] My column today at Reuters Wealth looks at where Social Security stands on the D.C. chessboard. […]

Posted by Social Security and government default: Q&A on your benefits | RetirementRevised | Report as abusive

[…] by millions of people: the Medicare card. …US social security shouldn't be cut: poll5 questions about Social Security and the debt ceilingGang Of Six Details – – Posted in […]

Posted by Bill Aims to Limit Identity Theft Using Medicare Cards – New York Times (blog) | Report as abusive

Notice, Obama tries to blame Republicans for this, but in reality America can’t afford “Social Insecurity” and Obamacare so Obama is willing to reduce “Social Insecurity” benefits even though we all have paid for it. I am young, let me out now, I don’t want Obamacare and I don’t want your false security. Washington doesn’t know what they are doing fiscally so stop stealing my money and wasting it. Let me opt out now!

Posted by TylerDurden | Report as abusive

[…] Reuters Blogs (blog) […]

Posted by Energy Pundit » Blog Archive » Late plan offers hope in debt battle – Boston Globe | Report as abusive

This article is amazing, in that it attempts to make it look as though it is President Obama who is demanding cuts to Social Security, Medicare and Medicaid, among other vital programs. The Democratic budget called for allowing the Bush tax cuts expire when they’re scheduled to expire in a couple years, but only for those individuals making over $200,000 a year or households making over $250,000. The higher tax would apply only to the amount that exceeds the $200,000 or $250,000. The tax cuts would be renewed for everyone making less than those amounts. But if you will read any objective news story on the budget talks, you’ll see that the Republicans are unwilling to let the tax cuts expire for the wealthy. It would give our economy $4 trillion over the next 10 years, but no, the Republicans have rejected this plan. Instead, they are demanding cuts to Medicare, Medicaid and Social Security.

It is not the president who is trying to decrease benefits; it is the Republicans. This article is deliberately misleading. I am unsubscribing to the newsletter, because it is clearly untrustworthy. I have no problems with differences of opinion. Misrepresenting facts, however, is inexcusable!

Posted by JFTortorella | Report as abusive

This article is amazing, in that it attempts to make it look as though it is President Obama who is demanding cuts to Social Security, Medicare and Medicaid, among other vital programs. The Democratic budget called for allowing the Bush tax cuts expire when they’re scheduled to expire in a couple years, but only for those individuals making over $200,000 a year or households making over $250,000. The higher tax would apply only to the amount that exceeds the $200,000 or $250,000. The tax cuts would be renewed for everyone making less than those amounts. But if you will read any objective news story on the budget talks, you’ll see that the Republicans are unwilling to let the tax cuts expire for the wealthy. It would give our economy $4 trillion over the next 10 years, but no, the Republicans have rejected this plan. Instead, they are demanding cuts to Medicare, Medicaid and Social Security.
It is not the president who is trying to decrease benefits; it is the Republicans. This article is deliberately misleading. I am unsubscribing to the newsletter, because it is clearly untrustworthy. I have no problems with differences of opinion. Misrepresenting facts, however, is inexcusable!

I agree.

Posted by aratosm | Report as abusive

( to JFTortorella ) on the one hand I would say, don’t shoot the messenger………but on the other hand, I would say, the reporting comes from the ‘4th estate’……..they are not on your side.

Posted by Robertla | Report as abusive

[…] Security benefits – something many worried about after President Obama said last month that he “couldn’t guarantee” the payments if default occurred. Likewise, Social Security and Medicare benefits both were exempted […]

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