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Can the government afford to send out Social Security checks next week if the debt ceiling isn't raised? The 28 million Americans expecting their payments on Aug. 3 will have to wait and see. Another 27 million people are scheduled to get checks later in the month. President Obama keeps warning that the government may not have enough money to pay all its bills, including Social Security, if the debt ceiling impasse isn't resolved by Aug. 2. If "we default, we would not have enough money to pay all of our bills -- bills that include monthly Social Security checks, veterans' benefits and the government contracts we've signed with thousands of businesses," Obama said in a televised address Monday night.
Missing Social Security payments is no small matter. The checks represent about 41% of the income of the elderly. Many seniors depend on it for 90% or more of their income. No one really knows what will happen next week since the U.S. is in uncharted territory. Only one thing is certain: The federal government won't have enough money to cover all its August expenses. It will be roughly $134 billion short by month's end, according to estimates. That hasn't stopped a whole lot of people from arguing that Social Security has an advantage over other federal obligations. They say the administration can just tap the massive Social Security trust fund to pay August benefits, estimated to total about $49.2 billion.
Treasury officials, however, are quick to shoot down this line of reasoning. "This type of financial engineering is untested, may not work, and is of questionable legality," said a Treasury official. There isn't any actual money -- or marketable securities -- in the Social Security trust fund. Instead, it's filled with $2.6 trillion in IOUs that the Treasury Department would have to redeem and then issue a corresponding amount of regular Treasuries to raise the necessary cash. This swap, in theory, would not affect the debt ceiling because the IOUs are included in it. So redeeming a certain amount would lower the nation's debt level and give Treasury the room it needs to borrow to pay benefits.
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That possibility would mean lower borrowing costs for the government, not the spike in interest rates that many were expecting. "Intuitively, this might not make sense because you would think there would be selling of Treasuries, but instead the Treasury market is well-supported," said Richard Bryant, head of Treasury trading at MF Global. The experts admit they're not sure how markets will react if there is no solution by the Aug. 2 deadline. But many believe that stocks will suffer more in the uncertainty caused by a debt ceiling crisis. "We'll have a liquidation of risky assets and a flight into quality," said Kim Rupert, Managing director of Fixed Income for Action Economics. "There really isn't an alternative [to Treasuries]."
U.S. Treasuries are such a massive market -- about $9.8 trillion -- that they dwarf the markets of other so-called "safe havens" such as gold, top-rated corporate debt or the bonds of other countries with AAA ratings. And the expectation that the U.S. Treasury will continue to pay the principal and interest payments owed on existing debt, even in the case of a prolonged deadlock, will give investors a sense of confidence, even if there is a downgrade. "I don't think a rating change will fundamentally change anyone's view about the likelihood of being paid back on Treasuries," said Josh Fienman, chief economist DB Advisors. "They will continue to think that Treasuries are 'money- good.'"
Fienman said that the U.S. debt ceiling crisis is widely viewed as less serious than the lingering worries about European sovereign debt. He said the U.S. needs to address its long-term government deficits, but that is a problem that needs to be solved in the coming decades, not coming days. "This is a self-inflicted crisis. No one in the market is unwilling to lend to the U.S., " he said. "Some people find it galling, but no matter what the U.S. does, it's able to borrow at extraordinarily low interest rates." Some worry about whether foreign investors will sour on U.S. Treasuries if there is a crisis. But countries with huge holdings of U.S. debt, such as China, have an interest in making sure that bonds stay strong during a debt ceiling crisis so as not to hurt the value of their existing holdings.
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