Social Security has made headlines as a potential bargaining chip in negotiations over raising the debt ceiling. But the real risk to the program—and its roughly 66 million beneficiaries—lies in a possible breakdown of those discussions and a U.S. default, experts say.
President Joe Biden and House Speaker Kevin McCarthy (R. Calif.) are set to meet on Wednesday to discuss raising the debt ceiling, the statutory limit on what the government is allowed to borrow to fund its operations. The government hit the ceiling of $31.4 trillion on Jan. 19, and since then has taken what Treasury Secretary Janet Yellen has called “extraordinary measures” to keep the government afloat. Within a matter of months, these stopgap accounting moves will no longer be effective; to stave off an unprecedented default, Congress must act before the U.S. runs out of borrowing capacity, which could happen as early as June.
Raising the debt limit doesn’t authorize new spending; it simply ensures the government can meet its existing obligations. Even so, it’s a difficult vote for Republicans politically, and they will likely try to enact concessions from Democrats in the process, strategists say. A conservative Republican group, the Republican Study Committee, has called for raising Social Security’s full retirement age and the Medicare eligibility age, among other measures.
Yet McCarthy appeared on “Face the Nation” over the weekend and said that Social Security and Medicare were off the negotiating table.
“The vast majority of Republican lawmakers recognize it’s a losing political issue, and they won’t go near it,” said Brian Gardner, Stifel’s chief Washington policy strategist. Some more conservative members of the Republican party—including the 20 or so who initially held out on McCarthy’s bid to become speaker—don’t wield enough influence to sway the entire party on benefit reductions, Gardner added.
Even if Republican leadership were to push cuts to Social Security, they would run into an obstacle in the White House. Raising the debt ceiling involves Congress passing legislation that Biden must sign into law, and such cuts would likely be a non-starter with his administration. The upshot is that while there may be chatter about Social Security cuts, the negotiations pose “zero actual risk,” to the program, said Chris Krueger, Washington strategist at Cowen.
An Unlikely (But Not Unthinkable) Scenario
If the discussions break down, however, all bets are off. The U.S. has never entered into default, so there’s no playbook on what exactly would happen if it comes to that. All Americans would be affected in some way or another, with older adults among the most vulnerable to even a short-lived default scenario.
Experts say default can’t be dismissed as a possibility, given the gridlock in Washington.
“Default is a low-probability event, but the odds are uncomfortably higher than they typically are,” Gardner said.
If the U.S. can’t borrow money, it would have to slash spending. In that scenario, the Treasury department does not have the ability to prioritize one type of payment over the other, Yellen has said. For example, even if the desire were there, the government couldn’t prioritize paying Social Security recipients over bondholders or vice versa.
“You can’t insulate any one group of people in a default, as much as people would like it to be true,” said Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities.
Although Social Security has its own trust fund, financed largely by payroll taxes, the Treasury’s inability to prioritize payments could prevent benefits from going out on time, Paul N. Van de Water, senior fellow at the Center on Budget and Policy Priorities, wrote in Sept. 2021 as the U.S. approached another debt limit. Even a slight delay in benefits would hurt the millions of Social Security recipients who rely on their checks for the majority of their income.
The way Social Security recipients would be affected in a default could depend on when it happens. That’s because Social Security payments aren’t all sent out at once. They’re delivered on a staggered schedule, depending on what day the recipient is born. Those who were born on the 1st through the 10th of the month get their checks on the second Wednesday of the month, for example.
A Looming Reckoning
Default is the worst-case scenario. A more likely resolution is that Congress reaches a last-minute deal to raise the debt limit and avoid default. Yet such brinkmanship would exact a price, as it did in 2011, the last time the country faced a debt ceiling standoff of this magnitude. The S&P 500 fell 16.8% from July 22 to Aug. 8, 2011, and didn’t recover for another six months. This time too, uncertainty would rattle financial markets, the U.S. credit rating agencies project. Market volatility could galvanize lawmakers to finalize a deal.
Even in the best outcome, the clock is ticking for Social Security. The program’s trustees project that the retirement trust will be depleted in 2034, after which the program will be able to fund only around 77% of scheduled benefits. To prevent a cut to current beneficiaries, Congress must act before then to shore up the program by raising taxes or cutting benefits to future beneficiaries, or some combination thereof. Any changes would almost certainly exempt current recipients and those within about 10 years of retirement.
The U.S. Treasury Department and the Social Security Administration did not respond to a request for comment by press time.
Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com
Source link
