The Real Reason Hitting The Debt Limit May Mean Social Security Checks Stop

It’s crunch time, and now we’re hearing as part of the hyper-political debt ceiling debate that that Social Security checks may stop.

But interestingly, we’re not just hearing that from Congressional Republicans: Obama has raised that spectre as well.

Many left-leaning critics are shocked, believing Social Security to be… well… secure, and are incensed that Obama would be willing to slaughter this sacred cow. After all, if in the case of default, the government can prioritize payments to various areas, why would Social Security be among the first? Talk about giving Main Street the finger!

Well folks, this one may not be about politics: there is a good legal and economic reason Social Security is put in jeopardy by hitting the debt limit.

As I’ve been ringing the alarm bell about for years (here’s a relatively-recent example), Social Security already has a funding problem, as it has gone “cash flow negative”. The program is supposed to be self-funding (from payroll deductions), but that only holds so long as current benefits do not exceed the total revenue from payrolls.

Now, “liberal” econo-bloggers and pundits will always at this point say “that doesn’t matter, Social Security has a big trust fund”. But it doesn’t. You see, all it has are IOUs from the federal government. These aren’t even Treasury securities that could simply be sold at market — they are bookkeeping entries. This is because the government long ago “restructured” Social Security, taking the accumulated and current savings and spending it on the usual guns-and-butter, leaving the Social Security Trust (and apparently most inside-the-beltway types and pundits) with a bunch of IOUs and warm fuzzies inside.

Technically, these bookkeeping entries are just the federal government keeping track of how much money it is “supposed to” re-allocate to Social Security expenditures… at a later date. Uhm-hmm. It’s exactly like that scene from “Dumb And Dumber”, where Harry and Lloyd have spent nearly $1 million in found money on frivolities, but dutifully replaced each dollar with an “IOU”. They happily present the suitcase full of IOU “Post-It” notes to the rightful owners of the cash when they finally meet them.

That’s Social Security. And to make up for that lack of true savings, the government has (for the past year) quietly been borrowing additional amounts each month to pay SS benefits, in essence, voluntarily exchanging the IOUs for Treasuries (which are immediately both borrowed and sold to pay out benefits).

1) Social Security is dependent on ongoing borrowing to meet current obligations at the 100% level.

2) Social Security “trust fund” obligations are just intra-governmental IOUs.

3) The government has no external obligation to pay anything back on these IOUs.

5) All US Treasury obligations are “senior” to these intra-governmental IOUs (the Treasury obligations are “external” and legal; the internal obligations are internal and extra-legal, or at least of flexible legality). Most notably: no US default is triggered if SS payments are violated, and doing so would help conserve cash to pay down actual, legal Treasury obligations.

CONCLUSION: The FIRST thing the government will HAVE to default on when it hits the debt ceiling is Social Security! This doesn’t mean every single check will stop, but SS will no longer be able to pay out anything above its current revenue, which means there will be some shortfall in benefits.

Further, it is difficult to see how the government could just selectively pay some SS benefits but not others, so the most likely course will be that everyone will get a monthly SS check that has some “haircut,” by some unknown amount (my guess is not more than 5%, though this percentage would naturally go up as time goes on).

Have you heard people in Congress raising the 14th Amendment “debt shall not be questioned” clause, as if it provides some sort of legal protection in the event of default? Well, even if it did, it clearly doesn’t apply to the Social Security “debt,” because those are just internal government bookeeping entries (as discussed above). No debt has ever been issued for this “trust fund”!

This appears to be the “dirty little secret” Obama is acknowledging by raising alarm bells about Social Security payments.

It would all be amusing if it weren’t so sad, for so many people on fixed incomes that are already being absolutely KILLED by the lack of returns on their savings (thank you Ben Bernanke!)

I imagine some debt deal will be reached before the events above transpire, because acknowledging the true reality of the government’s finances would probably be too painful for the political establishment. Aside from raising the ire of millions of voting pensioners, haircuts on Social Security checks would show in the bright light of day that Social Security is at its core a scam, not only from the outset, but also when it was “reformed” in the 80s. Frankly, our government has reached the point where it cannot pay even the most meagre of promised benefits to retirees (and the vast majority of them are really going to need that money.)

More than anything, this would show the federal government simply is not omnipotent as has been assumed since the Great Depression; it has just been coasting for decades on raw dollar imperialism, and then when that ran out, a series of macro-financial scams to keep the status quo going and politicians in their cozy dynastic tenures.

See why (in all probability) Bernanke is already hinting about further quantitative easing?

LOL, thanks for that insight. I sometimes have taken the simethicone (I dunno how it’s spelled, so I repeated you, haha) pills for gas when I travel (I get a bloated feeling, not flatulence, haha), but I have never throught about it affecting the heartburn. I do all the things I’m not supposed to, like eat before bed, anyway. I’ll try it, and you are most definitely right in the statement where you said:

“Our economic misery is caused by money being where it’s not supposed to be- in the government’s hands instead of the workers and producers.”

That it ABSOLUTELY correct.

Inflation is in no way resultant from increased productivity except as increased productivity is used as an excuse for inflation. Inflation is an increase in the money supply.Period. End of lesson.It can be measured as an absolute increase in the money supply in which case if there were no inflation prices would continually decrease as supply increases and the money supply stays constant. It can be measured as excess increase in the money supply beyond that increase necessary to maintain a stable price level for increasing production. (Excess) inflation actually tends to decrease productivity as future prices become more difficult to predict and resources are diverted into less productive lines because of the nonmarket forces of inflation that distort the market.

Inflation in this normal measurement distorts the market. It causes wealth to flow to the money printers as the greater issuance of money is all money belonging to the issuer- it did not result from production of goods and services. If the government doubles the amount of money in circulation then the government possesses by that act one half of the value of the money in circulation by fiat.It confiscates value from those who buy and sell with the money.

Inflation as the necessary result of increased production is a sort of Keynesian sidetrack, I think. Keynesians tend to believe that the stock of wealth is constant and that it cannot be increased so that prosperity of one nation or one class must come at the direct expense of other nations or classes. Keynesians equate inflation with increased production. That is why this government has since FDR tried to manufacture constant inflation so that there could be more prosperity. They government thinks it is stealing from the rest of the world and makes that fantasy real by using inflation to reduce take more of the goods and services of the rest of the world. Only the dominant economy can do that and not forever. Eventually the inflated currency must collapse. This one is collapsing.

And as an aside, increasing productivity does not necessarily result in increased production. In a declining economy productivity tends to rise as the less productive workers are discontinued as less product is produced and sold. 1 worker who is twice as productive as each other of 10 workers is retained and three others are dropped. Production of the outfit decreases as productivity increases.

Deflation, however, will result when productivity increases as a consequence of automation, computerization, mechanization and/or roboticization!

Production may well decline as new products made in a more precise fashion by machines last longer.

Case in point ~ automotive engines (gasoline and diesel) are not only less costly (discounting for inflation) but they last longer. They are also vastly more productive than they were 50 years ago (in terms of MPG).

Employment in the truck engine industry has declined precipitously.

One interesting tidbit I hadn't expected in the automation of the factory I used to work at is that you can shut it down, leave it there for a couple of years DOING NOTHING, and walk in some morning and start it up without any disastrous consequences.

Even the machines that make the machines are far better, safer to use, and last longer. Retooling just isn't the problem it had been for such a long time.

Neither deflation nor inflation, the same crittur, just different levels-positive and negative- has anything at all to do with those processes or with any sort of productivity or production. None. Not. Inflation is entirely and only an increase in the money supply. That is the definition of the term. If you wish to use it for whatever else comes to mind you are effectively trying to construct analogies that don't work. Increased productivity when the economy is expanding makes for more total production. If the money supply does not increase then prices fall. That is not deflation. It is a reduction in the price level because the same money is chasing more goods. If the money supply is increased at the same rate that production increases then you have absolute inflation but no relative inflation. You have a stable average price level. When (not if) the government increases the money supply at a higher rate than the increase in production then you have Iinflation, relative and absolute. When production is decreasing and the money supply is increasing you have Keynesian prosperity i.e. the numbers all show "expansion" but prices are rising generally and people in the real world are tightening their belts and losing their jobs i.e. becoming poorer.

The definition of Inflation/Deflation is a textbook thing. In the basic economics textbooks it is purely the increase/decrease in the money supply. In MBA-Finance textbooks it is confused with any sort of increase or decrease in prices, and value. Keynesians, who write most of the finance books do not and really cannot distinguish between a rise in a particular price and a general price rise and changing quantities of money in circulation.

Here's what happens when you improve productivity, prices drop.

When they drop fewer dollars are used ~ meaning more dollars are saved.

Due to the magic of cashmoney dollars that go into savings are quite effectively taken out of the rat race to BUY CONSUMABLES and can be turned into CAPITAL.

People borrow capital to do stuff ~ like purchase more efficient machines, or better housing.

If, on the other hand, you degrade productivity ~ like tax it more ~ (which happens when sales tax receipts are insufficient and they raise sales tax or inventory tax rates) ~ folks have to take money out of savings to pay more for the targeted products or services.

That reduces capital savings and makes the purchase of more efficient machines more difficult.

To some it looks like there's been a change in the money supply ~ when actually, the government has simply raised the price.

It's on rare occasions that you find the simple ADD MORE MONEY TO THE SUPPLY situation, and even rarer to find the simple TAKE MORE MONEY OUT OF THE SUPPLY situation.

The usual situation is muddied by taxation, and the effects might appear differently than anticipated.

Obama and his running dog lackeys are trying to get taxes raised ~ and for no reason whatsoever. There are plenty of federal government assets to pledge against current outstanding bills and debts.

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