Treasury Secretary Janet Yellen said in a letter to Congress on May 1 that the federal government may be unable to meet all of its debt obligations as soon as June 1 if the debt ceiling is not raised, something she has also said could interfere with the country’s ability to issue Social Security payments.
Yesterday’s update puts new urgency on talks in Congress and suggests the government’s fiscal situation is more precarious than was previously known, with many thinking the Treasury Department would be able to pay all its bills well into the summer.
“In my January 13 letter, I noted that it was unlikely that cash and extraordinary measures would be exhausted before early June. After reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time,” Yellen said in the May 1 letter.
“…our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time.”
Treasury Secretary Janet Yellen
The debt limit caps the total amount of allowable outstanding U.S. federal debt. The U.S. hit that limit—$31.4 trillion—on January 19, 2023, but the Treasury Department has been undertaking those “extraordinary measures” so that the debt limit does not yet bind.
If the U.S. were to default on its debts (which has never happened before), the consensus is that if would shatter financial markets—leveling 401(k) and other retirement accounts in the process.
While the partisan showdown boils down to Republicans wanting to use the debt ceiling as leverage to force Democrats to cut spending while the Democrats insist on a “clean bill” to raise the borrowing limit, that long runway to lift the cap is quickly running out.
After Yellen’s letter was released yesterday, President Joe Biden invited the four top Congressional leaders—including House Speaker Kevin McCarthy (R-CA), House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) to the White House on May 9 to discuss raising the debt ceiling.
Biden and McCarthy have not met to discuss the debt ceiling since February as the standoff concerning the spending cuts vs. a clean bill continues. The House last week passed a package to raise the debt ceiling by $1.5 trillion last week, but because it also includes steep spending cuts, beefed-up work requirements in safety net programs and other measures that Democrats would not accept, Schumer described the House legislation as “dead on arrival” in the Senate. Notably, the House bill did not include spending cuts to Social Security.
McCarthy responded to Yellen’s letter Monday with a statement that said, “The clock is ticking.”
McCarthy’s statement continued: “After three months of the Biden administration’s inaction, the House acted, and there is a bill sitting in the Senate as we speak that would put the risk of default to rest. The Senate and the President need to get to work—and soon.”
President Biden, meanwhile, will stress during the meeting next week that Congress must take action to avoid default “without conditions” and wants to initiate a separate process to address the federal budget and fiscal year 2024 appropriations.
White House Press Secretary Karine Jean-Pierre said during a February press briefing that “Congressional Democrats and Republicans in Congress voted three times in the Trump administration to lift the debt ceiling, and let’s not forget this has happened 78 times since 1960, 49 times under Republican presidents and 29 times under Democratic presidents. So, this has been done before. It’s their constitutional obligation to do this.”
Threat to Social Security payments
In a recent speech in Sacramento, Calif., Yellen said “a default on our debt would produce an economic and financial catastrophe,” and that “it is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security.”
Yesterday, Senator Mitt Romney (R-UT) was one of many lawmakers to release statements about the building urgency of the situation: “Defaulting on our debt is a frightening prospect—it would destabilize our economy, harm global commerce, and hurt our allies. Furthermore, we wouldn’t be able to send Social Security checks or pay our soldiers. The President must negotiate on raising the debt ceiling.”
Jason Fichtner, a former Social Security Administration executive and vice president and chief economist at the Bipartisan Policy Center, told CNBC.com in January that the Treasury Department would likely prioritize the payment of Social Security benefit checks. But he added that it is possible the Social Security Administration would delay payments to ensure it has enough cash on hand.
Some say Social Security payments will not be impacted because of a debt limit impasse due to an “escape clause” in the form of a 1996 law that allows the Treasury Department to pay Social Security and Medicare benefits even if there is a delay in raising the debt ceiling.
The clause allows for the Social Security and Medicare trust funds to be drawn down to keep benefits flowing until the debt limit is raised, while prohibiting them from being used to pay for other government programs.
Steve Robinson, chief economist for the bipartisan Concord Coalition, which advocates for fiscal discipline, wrote an issue brief in February on the issue. Robinson served as a senior policy advisor in the Social Security Administration from 2018 to 2021.
“The government’s cash-flow is simply too variable and uncertain from day-to-day to adopt any rational payment policy other than delay payments until sufficient funds become available. As a result, some observers have concluded that monthly Social Security benefits are also at risk of being delayed,” Robinson wrote. “But this conclusion overlooks a provision of current law that permits the disinvestment of the Social Security trust funds when necessary to pay benefits.”
As long as there is a positive balance in the Social Security trust funds, Robinson wrote that the Treasury Secretary has both the authority and the obligation to pay Social Security benefits.
“Even though Congress intended to prohibit the use of the trust funds to circumvent the debt limit, Congress also intended to allow the disinvestment of the trust funds when necessary to pay benefits. If Congress fails to increase the debt limit before the traditional extraordinary measures have been exhausted, the Treasury will be forced to choose between two conflicting priorities,” Robinson wrote. “Disinvesting the trust funds could have the unintended effect of implicitly creating another extraordinary measure to temporarily fund the government until the debt limit is increased; whereas the failure to disinvest the trust funds could have the effect of delaying the payment of Social Security benefits.”
Using that law today to keep Social Security benefits flowing without a debt limit increase wouldn’t be easy, Robinson noted—in large part because the Treasury has suggested that it lacks the ability to selectively pay some bills and not others.
Because Social Security payments are no longer all paid out at the beginning of every month and are instead staggered based on a beneficiary’s date of birth, Robinson wrote that even if the Treasury draws down Social Security trust funds to free up cash to make those benefit payments, the staggered benefit payment schedule throughout each month and an inability to prioritize payments mean some of the benefits might not end up getting paid.
Spending cuts could impact SSA
Another concern for Social Security due to debt limit negotiations revolves around ramifications if a provision in McCarthy’s House bill—the Limit, Save, Grow Act of 2023—was to somehow make it through any negotiations and become law.
The bill calls for limiting fiscal year 2024 discretionary spending to 2022 levels, which would result in a 6% cut to all agencies for the year—or significantly higher cuts if some programs such as defense are shielded from cuts.
“The Social Security Administration (SSA) is a key agency that would be negatively impacted by such a dramatically reduced funding level,” wrote Max Richtman, President and CEO of the National Committee to Preserve Social Security and Medicare, in an April 25 letter to the House of Representatives opposing the Limit, Save, Grow Act. He added that such a funding cut would result in longer wait times for benefits and assistance, and could reduce access for in-person services.
Acting Commissioner of the Social Security Administration Kilolo Kijakazi wrote in a March 17 letter to House Appropriations Committee Ranking Member Rosa L. DeLauro (D-CT) that returning SSA to the FY 2022 funding level—”or more drastically, cutting funds by 22% from the 2023 enacted level, would greatly harm our ability to serve the public as we are already struggling to recover from the effects of the pandemic.”
Kijakazi said a return to FY 2022 funding levels in FY 2024 would force SSA to, among other things:
• Close field offices and shorten hours.
• Implement a hiring freeze, which means a reduction of over 5,000 employees who are essential to processing retirement claims, making disability decisions, answering the National 800 Number, and issuing new and replacement Social Security cards.
• Furlough staff for over 4 weeks and lay off approximately 6,000 employees.
SEE ALSO:
• 3 Proposals to ‘Fix’ Social Security
• 7 in 10 Americans Suspect They Won’t Receive Social Security Benefits
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
