Social Security & the Debt Limit

{Crossposted from dKos Social Security Defenders Group}

Social Security has been off the radar this week for obvious reasons, progressives being more focused on efforts of Republicans to win the War on Women via the Continuing Resolution. Plus while Paul Ryan’s original Roadmap proposed privatization of Social Security his Budget proposal for next year left it mostly aside (except for an obscure ‘trigger’ mechanism for future cuts) in favor of a trillion dollar assault on Medicaid and a proposal to voucherize Medicare. Which only leaves one current assault vehicle, the pending bill to raise the Debt Limit which under current estimates needs to happen by mid May, and sure enough there are rumblings to this effect, no changes to Social Security, no votes to raise the Debt Limit from the Republicans.

So this seems an opportune time to explain the actual relation between Social Security and Public Debt and the paradoxical effects on debt from cuts to future benefits. Because all else held even all this does is increase real debt over the medium term (25 years) while reducing purely theoretical debt over the God help us Infinite Future Horizon. Conceptual unpacking in Extended.As usual a good starting point for the serious student is the Budget Concepts and Budge Process (pdf) section of the Analytical Perspectives of the Budget (html index) released each year by OMB to illustrate the President’s budget both conceptually and historically.

But even beofre citing definitions I would like to direct Kossacks (and any visitors-welcome!) to a very handy web tool maintained by Treasury called Debt to the Penny which true to its name will give you total federal debt to the penny at the end of any specified business day or over date ranges. For example as of close of business Thursday total ‘Public Debt’ was $14,264,245,526,311.58. This figure is the sum of ‘Debt Held by the Public’ at $9,652,195,544,012.12 and ‘Intragovernmental Holdings’ at $4,612,049,982,299.46 (‘debt to the penny’ meaning what it says).

Now ‘Intragovernmental Holdings’ is what OMB calls ‘Debt held by Government accounts’ which in turn “means the debt the Treasury Department owes to accounts within the Federal Government. Most of it results from the surpluses of the Social Security and other trust funds, which are required by law to be invested in Federal securities.” So the commonly expressed opinion that Social Security Trust Funds are not counted in that total $14 trillion of debt cited in the MSM is dead wrong, they constitute $2.6 tn of that $4.6 tn of ‘Intragovernmental Holdings’ or 18% of the total $14.3 tn in Public Debt. In fact Social Security is by far the biggest creditor the U.S. has, with Treasury holdings double those of the Fed and two and a half times that of our largest foreign lender the Chinese.

‘Public Debt’ is not precisely the same as ‘Debt Subject to the Limit’ but for all practical purposes it is the same $14 tn plus, for those interested Treasury supplies the following in their FAQ

What’s the difference between the Public Debt Outstanding and the Public Debt Subject to Limit?

The Public Debt Outstanding represents the face amount or principal amount of marketable and non-marketable securities currently outstanding. The Public Debt Subject to Limit is the maximum amount of money the Government is allowed to borrow without receiving additional authority from Congress. Furthermore, the Public Debt Subject to Limit is the Public Debt Outstanding adjusted for Unamortized Discount on Treasury Bills and Zero Coupon Treasury Bonds, Miscellaneous debt (very old debt), Debt held by the Federal Financing Bank and Guaranteed Debt

.
With the conceptual background set, lets see how Social Security Trust Fund Operations interact with the Debt Limit.

And the answer is simple, though a little counter-intuitive. If Trust Fund principal balances go up in any given year due to a surplus of income over cost adding new offsetting Special Treasuries then so does ‘Intragovernmental Holdings’ and so in turn ‘Public Debt’. On the other hand if in any year total cost exceeds total income including interest, the flow of offsetting Special Treasuries is reversed, then Trust Fund principal goes down and in turn so does Public Debt. In between those two outcomes is a series of years where income EXCLUDING interest trails cost, but the accruing interest covers the gap, in which case the rate of principal increase is slowed and so the rate of growth of total Public Debt due to increased amounts of Intragovernmental Holdings.

Put all of that together and what do you get? Short term cuts in Social Security benefits absent any changes in revenue INCREASE the rate of principal accumulations of Intragovernmental Holdings and so ADD TO DEBT SUBJECT TO THE LIMIT. And the same is true for any benefit change starting before the projected date the Trust Funds hit their maximum, which right now is about $4.2 tn in 2023.

Which is why holding Social Security hostage to this year’s Debt Limit is simple bullshit. one has nothing to do with the other, and any attempts to start phasing in benefit changes via changes in the index (as B-S would starting in 2012) makes total Debt Subject to the Limit HIGHER and not lower. In fact far from giving our children and grandchildren a break it would absent other changes just time shift debt repayment forward in time while making the principal balances and hence ultimate payment amounts larger. It is all more Bait and Switch, just sophistry using ideas about seeming fiscal rectitude to screw over worker-retirees starting ten years out.

(But such a move would reduce ‘Unfunded Liabilities’, which opponents of SS wrongly equate to ‘Debt’. They aren’t but that will be the subject of a later post.)