Don’t Worry: We are Flush with Cash!
Senator Jim DeMint (R-SC) yesterday:
"There are enough assets in Social Security and Medicare to pay the benefits of those programs for several years," he said. "Other programs can be funded from tax revenue. There certainly will be disruption, but this is not a deadline we should rush and make a bad deal and do something that cuts benefits from seniors without giving them better choices."
He said something similar this morning on the Today show: Sen. Jim DeMint On Debt Ceiling: ‘We Don’t Need To Panic And Rush Into A Deal’.
Without getting into the specifics, I must confess to finding this assertion confusing insofar as the standard GOP line of late has been that we are “broke” and therefore we need immediate austerity. In fairness, I am not sure I have ever heard DeMint use that word (i.e., “broke”) but he certainly has been a fiscal hawk. At a minimum, assertions like that above are disingenuous (at best) because their veracity is questionable and, even to the degree to which they are true, contain a large number of unspoken assumptions about what else might not be paid for to allow such a scenario to play out. Further, they utterly ignores likely consequences in financial markets.
?
By law operating surpluses of the Social Security and Medicare systems are used to purchase Treasuries. Those are the assets Sen. DeMint is referring to. In order to turn them into cash they would either need to be sold or redeemed. In order to redeem them the Treasury would need to borrow, i.e. turn them into other bonds.
The only real prospective buyer for the holdings of the trust funds is the Federal Reserve. I find the prospect of following Sen. DeMint’s suggestion and paying Social Security’s and Medicare’s benefits by inflating the Fed’s balance sheet a harrowing one.
I believe he is referring to how hitting the debt ceiling has been delayed in the past. The debt ceiling caps both debts to the public and government debt, which are obligations to programs like SS and Medicare that do not reflect current obligations to pay — they are accounting devices. In the past, the government delayed government debt during a crisis and then brought it back up to where it was supposed to be after a deal was struck.
I posted that without reading Dave’s comment; I think there is a separate issue which is that the government is one of the biggest purchasers of treasuries and in the past to avoid the deadline, the Treasury began selling debt it was holding.
@Dave Schuler:
My impression was that DeMint meant that the ongoing revenue stream (payroll taxes, Medicare premiums, etc) that is dedicated to these programs will be sufficient to pay for them in the very short term. For Social Security, that is approximately correct — the current shortfall is relatively small compared to total expenditures. Medicare is in worse shape.
PD, the problem that I see is that we’re facing somewhat different circumstances now than in the past. Both Social Security and Medicare are cashflow negative.
ratufa, it would need to be the very short term. According to the Trustees’ report Social Security is running a pretty sizeable deficit. According to the Trustee’s report last year was more than $100 billion and this year it’s expected to be more.
So, for example, raising the debt ceiling won’t wait until the end of 2012.
Dave, I don’t know if on a day to day basis we are in a defecit or surplus.
Let me just clarify my comment based upon this Congressional Research Report (pdf). After a debt ceiling crisis in the 80s, legislation was enacted to give the Treasury room to manuver to avoid the debt ceilng; it was authorized to suspend investing or reinvesting government securities to federal employee pension accounts, to suspend purchases of government securities with FICA money, to delay auctioning securities, and to sell government-held securities before maturity. These are all things I believe Bush did in 2002, when the debt limit was supposed to hit on May 16th, and deal wasn’t reached until June 28th.
It may be that the treasury has less room to manuever than in 2002.
@PD Shaw:
Since filing of payroll taxes is either monthly or quarterly and Social Security benefit checks are issued three times monthly, Social Security is almost undoubtedly in deficit by the third week of the month every month.