Myth 1: If a deal is not reached by August 2, the U.S. will default on its debt.
Fact 1: The Treasury Department can prioritize payments in order to avoid a default.
The Treasury Department is due to pay off $30 billion in maturing short-term debt. But we also know that the Treasury has the ability to prioritize its payments and pay that particular $30 billion out of the $172 billion it collects in tax revenue. As the Bipartisan Policy Center has calculated, after paying $30 billion in interest payments in August, Treasury could, if it ceased all other functions (see page 13 of this document), also pay for Social Security, Medicare, unemployment benefits, and payments to defense contractors. Technically speaking, there is no need to default in the absence of a debt ceiling agreement.
This is not an ideal solution and it entails some significant risks (mainly timing difficulties), but it could be done if necessary.
In addition, the Treasury could sell some of its assets in order to pay the bills. That’s an expensive option at this point, since it would probably mean selling them at a low price, but these are not normal times and a fire sale beats a default.
Myth 2: If the debt ceiling isn’t raised the government won't be able to pay Social Security benefits.
Fact 2: There are approximately $2.6 trillion dollars in the Social Security Trust Fund. Those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit. Treasury Secretary Timothy Geithner could convert that interagency debt into publicly-held debt, preventing not only a technical default but also preventing any delay in government payments.
President Barack Obama has suggested that if the Treasury prioritized payments in order to prevent default on the debt, it might do so on the backs of seniors by not sending out their Social Security checks. This is a particularly troubling rhetorical move by the White House. As the president and his advisers know, there are ways for the government to pay these benefits—messy ways, yes, but still viable—in the absence of a debt-ceiling agreement. That’s what the president should be saying rather than trying to scare seniors.
According to a Bipartisan Policy Center report, incoming revenue on August 3 will amount to $12 billion. At the same time, the government is scheduled to spend some $32 billion—most of it in the form of Social Security checks. How do we make up the difference?
First, remember how Social Security works. Starting now, the difference between payroll-tax revenue and Social Security benefits is made up by redeeming the IOUs in the Social Security Trust Fund. In order to pay back this IOU, Treasury has to borrow the money, which increases the debt held by the public by the same amount. In other words, if Treasury were to redeem the needed Social Security bonds and issue new marketable Treasury bonds to make good on them, it would be a one-for-one swap.
There is a potential glitch, however, having to do with whether Treasury has the authority to use payroll tax money to pay benefits rather than to “invest.” According to Washington Post “Fact Checker” Glenn Kessler, the Treasury has done it before: