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Kabar,

I’ll address this question to you because you seem to have one of the more informed views of the structure of the social security trust funds in here, but if anyone else has an opinion on it, please chip in.

My question: What is to stop the administration from literally looting the trust fund after the debt hits the debt ceiling?

I’ll explain what I mean. Everyone is assuming that the inflows to the government are about $170 bn in August, of which I believe around $50 billion is from social security taxes. That money is presumed to be the amount available to pay bills in August, bills that total around $310 billion.

It’s assumed that the $50 billion taken in as SS taxes will go to pay bills, including, if Obama directs it, payment to social security recipients. However, what is to stop the administration from just cashing in $50 billion of the non-public debt and using that money to pay the social security recipients, then spending the SS taxes received that month on other expenses?

The cashing in of $50 bn of non-public debt would open up an equivalent amount under the debt ceiling that the Treasury could then issue as publicly held debt, providing the funds to pay the SS recipients.

This would leave the entire $170 bn of August tax receipts available to pay the rest of the August bills, so they would only come up short about $90 billion, instead of $140 billion.

I guess it’s a two part question: 1) Could this be done legally? and 2) Would it be a good thing or a bad thing for those not wanting the debt ceiling to be raised?

And beyond that, could they raid the trust fund for the other $90 billion the same way? Because if they could, it wouldn’t last very long taking nearly a $150 bn hit each month. Plus, Obama could continue to spend money like water for another year and a half or so, before the fund hit zero. The debt ceiling would be moot until then. And then there’s the other trust funds besides...

I’d like to think there’s no way people would stand for it, but as you can see from other comments, this stuff is pretty obscure and hard to digest. If he did it, he just might get away with it for an extended period of time.

Thoughts?

My question: What is to stop the administration from literally looting the trust fund after the debt hits the debt ceiling?

The trust fund does not contain assets, just unfunded liabilities, which is why the trust funds are included in the $14.3 trillion national debt. Here is what the Congressional Budget Office said about trust funds:

When a trust fund receives payroll taxes or other income that is not needed to pay benefits immediately, the Treasury credits the fund and uses the excess cash to reduce the amount of new federal borrowing that is needed to finance the governmentwide deficit. That is, if other tax and spending policies are unchanged, the government borrows less from the public than it would in the absence of those excess funds. The reverse is the case when revenues for a trust fund program fall short of expenses. Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.

I guess it’s a two part question: 1) Could this be done legally? and 2) Would it be a good thing or a bad thing for those not wanting the debt ceiling to be raised?

I don't think it would be legal to take SS revenue from the payroll tax and use it for something else. The trust funds are included in the debt limit. SS is paying out more than it is taking in. The SSTF must cash in some of its IOUs to make up the shortfall. I guess the Administration could decide not to redeem the IOUs to make up the difference, but it would be the same as committing a default for publically held T-bills.