Social Security and the Debt Ceiling: It's a Good News/Bad News Scenario

Last month, more than 66 million people received a Social Security check, 49.3 million of whom are retired workers. Based on annual surveys conducted by national pollster Gallup since 2002, the checks these seniors receive each month are vital to making ends meet.

Unfortunately, the looming uncertainty regarding the U.S. debt ceiling is creating a wall of worry for the program's tens of millions of beneficiaries. Will they continue to receive their monthly checks if the U.S. Treasury runs out of cash?

The answer to this question offers both good and bad news for Social Security and its recipients.

A person holding an assortment of fanned cash bills in their hands.

Image source: Getty Images.

What is the U.S. debt ceiling and why is it so important?

Before digging into the meat and potatoes of what could happen to Social Security if the U.S. goes off the proverbial debt-ceiling cliff, it pays to understand what the debt ceiling is and why it's so important.

Put simply, the debt ceiling is the authorized borrowing capacity for the federal government. It accounts for all existing spending and projects currently on the docket but doesn't include any new financial obligations.

Since 1960, Congress has acted, in some capacity, to increase the debt limit on 78 separate occasions. This has happened under Republican and Democratic presidents, meaning debt-limit increases haven't been specific to any particular party. At no point has the U.S. Treasury defaulted on its financial obligations.

In January 2023, the U.S. hit its technical borrowing capacity of $31.4 trillion. Since then, extraordinary measures have been used by the U.S. Treasury to buy lawmakers time to come to a deal. That time has nearly run out, as of the writing of this article on May 25.

In a letter addressed to House Speaker Kevin McCarthy (R-Calif.) from Treasury Secretary Janet Yellen on May 22, Yellen had this to say:

In my May 15 letter, I noted that our best estimate was that Treasury would be unable to continue to satisfy all of the government's obligations by early June if Congress does not raise or suspend the debt limit before that time... With an additional week of information now available, I'm writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government's obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1.

If the lawmakers were to fail for the first time in 79 attempts to find common ground to raise or suspend our nation's borrowing capacity, certain financial obligations wouldn't be paid. To add, we'd likely see a cascade of higher interest rates on everything from mortgages to credit cards, as well as a heightened likelihood of the U.S. falling into a recession. In other words, nothing good comes from a debt default.

What does that mean for Social Security's 66.6 million beneficiaries and the program itself? Let's take a closer look at this good news/bad news scenario.

The good news: Social Security checks should be paid

Let's not beat around the bush, because I'm sure there are beneficiaries genuinely worried about whether or not their June Social Security check is going to show up: You should be paid.

On one hand, Social Security is a massive obligation for the federal government. But thanks to a law passed 27 years ago, the Treasury has a duty to ensure that Social Security benefits keep flowing to eligible beneficiaries.

This law, Section 1145 (Protection of Social Security and Medicare Trust Funds), reads as follows:

"No officer or employee of the United States shall --

  1. Delay the deposit of any amount into (or delay the credit of any amount to) any Federal fund or otherwise vary from the normal terms, procedures, or timing for making such deposits or credits,
  2. Refrain from the investment in public debt obligations of amounts in any Federal fund, or
  3. Redeem prior to maturity amounts in any Federal fund which are invested in public debt obligations for any purpose other than the payment of benefits or administrative expenses from such Federal fund."

In plain English, Section 1145 effectively obligates Treasury Secretary Yellen to use Social Security's asset reserves as a tool to continue paying benefits. It also restricts the federal government's ability to use Social Security's $2.832 trillion in asset reserves (as of April 30, 2023) for any purpose other than paying benefits and covering Social Security's administrative expenses.

Between 1983 -- the last time a major bipartisan overhaul of the program was undertaken -- and 2020, Social Security brought in more revenue than it paid out every year. This excess cash, known as the program's asset reserves, is required by law to be invested in special-issue bonds and certificates of indebtedness. What's great about this setup is that every cent is accounted for, and Social Security is generating interest income from the federal government.

With an estimated benefit outlay of $1.375 trillion in 2023 and $1.471 trillion in 2024, the program's current asset reserves could, in theory, cover approximately two years' worth of payouts.

A neat stack of one hundred dollar bills tied up by thick chain and a lock.

Image source: Getty Images.

The bad news: Social Security, as a whole, isn't immune to a debt default

But there's a not-so-rosy side to a potential U.S. debt default that goes well beyond just economic implications. A debt default could adversely impact Social Security two ways.

Although the program's asset reserves are protected from being diverted to cover other expenses, drawing down this $2.832 trillion investment portfolio wouldn't be good news.

Due to nearly a half-dozen demographic shifts, the Social Security program paid out more than it brought in during 2021 and 2022. This trend is expected to worsen in the years to come and eventually deplete the program's asset reserves by 2034, according to the 2023 Board of Trustees Report. If Treasury Secretary Yellen is obligated to draw down these asset reserves to cover benefit payments in the event of a debt default, the financial foundation of Social Security will undoubtedly weaken.

The other problem for our nation's most successful retirement program is that it could, at least temporarily, lose one of its ancillary sources of income. The Social Security program is one of the largest holders of U.S. government debt. As noted, excess cash is required by law to be invested in special-issue Treasury bonds. Although benefit payments are compelled to be made via Section 1145, there's no law that requires the federal government to make interest payments to the Social Security program in the event of a debt default.

Last year, Social Security generated a hearty $66.4 billion in net-interest income from its asset reserves, which represents 5.4% of total revenue for the program. In 2023 and 2024, net interest is expected to add $65.7 billion and $64 billion in annual revenue, respectively. If no debt deal is reached, interest payments to Social Security can be stopped indefinitely. That would put a program already spending more than it brings in on worse financial footing.

If there's a silver lining here, it's that Congress's track record of forging debt deals is perfect. Although it could take until the 11th hour for a deal to get done, history suggests a worst-case scenario for Social Security won't come to fruition.

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