Nah, debt default won’t stop Social Security checks

Treasury has a way to ensure continuity of Social Security benefits payments without the need to raise the debt ceiling

The local Memorial Day parade in my Maryland suburb remains one of my favorite things to attend. I relate this only to say, enjoy the Memorial Day weekend, but be mindful of the Memorial part of it. Missing for the last several years from our local parade is the elderly Pearl Harbor attack survivor. Nationally, only one survives as the infamous day in 1941 fades deeper into history.

Once, the local chapter of a Masonic organization was missing a member. They let me, a non-member, temporarily join their unit. A lifelong amateur pianist, my job was to play patriotic songs on an air-powered calliope mounted at the rear of their parade platform. Luckily I was not authorized to wear the fez. The brass-piped organ was sort of drowned out by the noise of the gas generator at the front of the platform. I’m not making this up. There’s a photo of my one-and-only participation in a parade. It came up in my daily your-photo-history email from Microsoft cloud.

If Pearl Harbor awoke the confidence of a nation, the vaguely understood effects of the possible debt default have generated a lot of free-floating anxiety. If nothing else, they remind us of the value of long term investing in the TSP.

Through April, TSP fund returns were positive for the year, with the I fund gaining in the double digits. In fact, the number of people with more than a million dollars in their TSP accounts is on the rise again, according to the Federal Retirement Thrift Investment Board. I mention stocks and bonds in the context of debt default, Social Security, and what happens after the somewhat arbitrary date of June 1.

If you’re receiving Social Security payments, the smart thinking says they won’t stop coming. Writing in the Wall Street Journal, two former Justice Department attorney-advisors (one each from the Trump and Biden administrations) make the case why Social Security payments will go on. Conor Clarke and Kristin Shapiro state that Social Security payroll taxes, invested in Treasury securities, count toward the debt limit. Treasury “has the authority to redeem these securities to pay benefits,” they write. “When it does so, debt subject to the statutory limit declines.” That is, paying Social Security benefits create “headroom” under the limit. Not to mention that the payment of Social Security benefits is a legal obligation of the government.

That Social Security tax collections are by statute invested in Treasury securities makes them safe, at least as safe as anything can be under the heavenly firmament. But it also means they get a dismal return. It’s partly why the actuarial numbers for the Social Security trust funds are so scary. Social Security, like many public and private pensions plans, simply has insufficient assets to cover its future liabilities.

Graphic illustration of that fact comes from an informational study by the U.S. Postal Service Office of Inspector General. It shows how ultra-safe investments perform relative to a mix you might see in the average TSP account. Not surprising, but still graphic.

The main finding, from research specialist Joy Sanzone: In its retiree beneficiary accounts at the end of fiscal year 2022, USPS had $398 billion. Had it invested in a 60% stock-40% bonds mix starting in 1972, shortly after USPS as we know it was established, it would have had $1.2 trillion. More than four times as much.

The research points out that, by estimates from the Office of Personnel Management, the Postal Service’s retirement deficit, including future retiree health benefits, stands at about $96 billion. With the more aggressive investment strategy, it would have a surplus of nearly $800 billion.

Imagining all that extra money is a little like the fantasies we all indulge in when Mega Millions build up to a billion-dollar payout.

As for Social Security, with current trends it will run out of money in 2033 or 2034. In reality it’s a pay-as-you-go system, as is everything at the federal level. Still, going with the trust fund model, many variables affect future Social Security solvency: the number of people paying in and how much, the payroll tax rate, the retirement age, and the investment strategy. A sclerotic political class is unable to deal with any of it.

But if Social Security checks stop coming sometime in June, it won’t be because of debt default.

Nearly Useless Factoid

By Alyssa Miguel

The platypus doesn’t have a stomach.

Source: Live Science

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