President Obama said in a recent interview with Scott Pelley of CBS News, "I cannot guarantee that those [Social Security] checks go out on August 3rd if we haven't resolved this issue [increasing the debt ceiling]. Because there may simply not be the money in the coffers to do it."
When I heard that, I took him at his word.
Why? Economist Tom Saving points out the following:
By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration. And when the Treasury does, total government debt subject to the debt limit falls by the amount of the redemption--thus freeing up the Treasury's ability to issue new bonds equal in amount to the redeemed Trust Fund bonds.
Therefore, meeting Social Security obligations in August, September and all future months in this fashion would add nothing to the gross government debt subject to the debt limit. Not, at least, until the $2.4 trillion Trust Fund is exhausted in 2038.
I've been pointing out for years, as have many economists, that the Trust Fund is a fiction whereby one part of government owes money to another part of government. But what I had failed to do--and what Tom Saving did do--is follow the implications of that fact. Simply by a transfer within government, the Social Security Administration can come up with funds to pay benefits for a long time--without adding any new debt to the gross debt.
That doesn't solve the spending problem. But when the overall constraint--the debt ceiling--is on a number that has two components--debt owed to the public and debt owed to other parts of government--the government has a degree of freedom that Obama either ignored or doesn't know about: the ability to move debt between the two categories.