The Facts About the Debt Ceiling

Separating economic myths from economic truths


Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

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:

There is a technical wrinkle involving the fact that payroll taxes that are collected are supposed to be immediately turned into Treasury securities, but there could be ways around that, such as putting the monies in a noninterest bearing account, as during the 1985 debt crisis. "Although some of the Secretary's actions appear in retrospect to have been in violation of the requirements of the Social Security Act, we cannot say that the Secretary acted unreasonably given the extraordinary situation in which he was operating," the General Accounting Office later concluded….

Still, during the 1996 debt limit crisis, Treasury Secretary Robert Rubin announced that Treasury did not have sufficient funds to pay Social Security benefits. Congress rushed to pass a special law that said the Social Security benefits did not count against the debt limit. Was this designed to pressure the Republican-led Congress, or had even a shrewd operator like Rubin run out of options? However, Congress later that year passed a law, 121-104, that codified Treasury's authority to use Social Security trust funds to pay benefits and administration expenses in the event a debt ceiling is reached, which could give the administration the authority they need in the current crisis.

The Congressional Research Service has also explored this question in a series of reports this year. The answer is unfortunately inconclusive and buried in a footnote: "Under normal procedures Treasury pays Social Security benefits from the General Fund and offsets this by redeeming an equivalent amount of the trust funds' holdings of government debt. In order to pay Social Security benefits, and depending on the government's cash position at the time, Treasury may need to issue new public debt to raise the cash needed to pay benefits. Treasury may be unable to issue new public debt, however, because of the debt limit. Social Security benefit payments may be delayed or jeopardized if the Treasury does not have enough cash on hand to pay benefits."

Myth 3: The Treasury cannot use the Social Security Trust Fund to delay a default past August 2.

Fact 3: While the Treasury cannot use money from the Social Security Trust Fund, it can "disinvest" from other trust funds to pay for benefits.

Treasury can "disinvest" from some of its trust funds. Here's how it works according to the legislative director of the National Active and Retired Federal Employees.

Each day, the U.S. Treasury takes in several billion dollars for federal trust funds. For Social Security, these dollars come in the form of employer and employee payroll taxes. Federal employee and Postal Service contributions to the CSRDF [Civil Service Retirement and Disability Fund] also inject cash into the Treasury. Usually, this cash is immediately invested in nonmarketable government securities—to remain available to finance future benefits. But if a debt limit breach appears imminent, the Treasury Department could "underinvest" this revenue as it arrives. The trust funds would be given a temporary IOU that does not count against the debt ceiling, and the withholdings would be used to pay off the government's cash obligations until an increase in the debt ceiling could be settled.

The Treasury Department could also make cash available from the trust fund by "disinvesting" some of the money used to buy government bonds. Under this approach, bonds held on behalf of trust funds would be converted to cash earlier than normally needed. Like the "underinvestment" option, cash from this transaction would be used to pay federal obligations on a temporary basis.   

The disinvesting approach is a temporary accounting device that would help maintain the Treasury's cash flow.

According to the Government Accountability Office, the use of "disinvestment" to pay for benefits has been used during a previous debt-ceiling crisis:

In the past, Treasury has taken a number of extraordinary actions such as temporarily disinvesting securities held as part of federal employees' retirement plans to meet the government's obligations as they came due without exceeding the debt limit, until the debt limit was raised.

In fact, it happened during the last big debt-ceiling crisis in 1995-1996. According to the GAO, Treasury managed to remain technically under the debt ceiling and incurred about $138.9 billion in additional debt that normally would have been subject to the ceiling by disinvesting $46 billion in Civil Service fund securities in November 1995 and February 1996. The Treasury also suspended the investment of $14 billion in fund receipts in December 1995 and exchanged about $8.6 billion in Civil Service fund securities for Federal Financing Bank securities.

These actions, of course, are nothing more than short-term budget gimmicks. But they would allow the U.S. to avoid defaulting on the debt. Once these options are exhausted, however, there will be nothing left to do but raise the debt ceiling or dramatically cut government spending.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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  1. Fact 2: There are approximately $2.6 trillion dollars in the Social Security Trust Fund.

    You think that actually exists? I have some bad news for you. (Though we’ve been floating by for the last few months by effectively committing accounting fraud, so I guess we might as well go with it.)

    Get rid of the debt cap (the point at which we stop paying our national credit card bills) and replace it with a balanced budget amendment with teeth (so we don’t run up those bills in the first place.)

    1. Oh STFU. The SSA owns $2.6 trillion in Treasuries today.

      Now a full default may wipe all Treasuries out – in that case we are in Mad Max land.

      1. Right on. My retirement account owns a big pile of Jeffersonian Super-Duper Bonds. Jeffersonian hisself borrowed the actual cash from the account long ago and spent it on hookers, blow and bling. Those bonds will be so handy come retirement time!

        1. Jefferson was astute. I mean, hookers and coke? They work together well.

          If you don’t like your Super-Duper Junk Bonds then sell the goddamn things.

          Its a free market (except for capital gains).

          Buy News Corp equity – its on sale.


          This historical video would imply that Jefferson spent it on hookers and Whiskey.

          1. And speaking of Jefferson’s debt


      2. “Now a full default may wipe all Treasuries out – in that case we old fuckers are in Mad Max land.”


      3. Oh STFU. The SSA owns $2.6 trillion in Treasuries today.

        We’re not broke because we owe ourselves $2.6 trillion dollars. Yeah.

        1. I’m gonna borrow a trillion! How hard can it be?

          1. Even you wouldn’t lend you a trillion dollars.

            1. I probably wouldn’t lend myself a tenner in local currency. 🙂

              (which equals approx. US$ 20, but that doesn’t change the principle either)

      4. Fact 2: There are approximately $2.6 trillion dollars in the Social Security Trust Fund.

        A portion of the federal government has several trillion dollars in IOUs from a different portion of the federal government. These IOUs are not assets the federal government can use to pay Social Security checks.

        There is no SS trust fund. All the money has been spent.

      5. SS is the perfect national debt perpetual motion machine. If benefits exceed revenues, the feds have to borrow to pay off the T-bills that SSTF cashes in. If revenues exceed benefits, then the Treasury has to issue new debt to “sell” to the SSTF.

        Basically, unless revenues exactly match payments, SS is constantly increasing the debt.

      6. Re: shrike,

        Oh STFU. The SSA owns $2.6 trillion in Treasuries today.

        Mr. Ohara: “Bonds. They’re all we’ve saved. All we have left. Bonds.”

        1. New “GONE WITH THE SPEND”

          Mr. SHRIEK
          Bonds. They’re all we’ve saved. All we have left. Bonds.

          But what kind of bonds, Shriek?

          Mr. SHRIEK
          Why, Treasury bonds of course, darling.

          Treasury bonds. What good are they to anybody?

          Mr. SHRIEK
          I’ll not have you talking like that, Veronique De Rugy.

          Oh, Paw, what are we going to do with no money and, …and nothing to eat?

          We must ask Timmy Geitner. That’s it. We must ask Timmy.

          Ask Timmy?

          MR. SHRIEK
          Yes. Timmy will know what’s to be done. Now don’t be bothering me. Go out for a ride. I’m busy.

      7. You believe whatever Obama tells you, don’t you, shrike…

      8. Oh STFU. The SSA owns $2.6 trillion in Treasuries today.

        You fucking ignoramus. If the Treasury needs to cash out the SSA bond, it has to sell one of its own bonds to pay for it–so in the end, it will end up adding even MORE debt than the $2.6 trillion thanks to the interest that must be paid on the bond.

        Only people (and institutions) who are financially fuxored have a consistent habit of using one line of credit to pay another one.

        1. The practice of using one debt account to pay for another debt account is called kiting. For example, if I have two credit cards and one has reached it’s limit, I can use the second card to make payments on the first card. If I make a big enough payment, I can use the first card to make payments on the second card. The practice was originally applied to checking accounts back in the days when there was a 5 day or more wait while checks were mailed between banks for payment. A person could write a “hot” check to cover one account, then use the other account to write a “hot” check to cover the debt in the first account. The problem with kiting is that the house of cards eventually collapses. It is now illegal in almost every state, but the government is allowed to use debted accounts to pay for other debted accounts.

    2. Yeah, I was reading this and going all WTF? on de Rugy. Sometimes Reason just seems to be taunting the liberals. This is directly contradicted by Jacob Sullum’s “How Can You Tell When An Imaginary Trust Fund Disappears?”, March 25, 2010.

      1. All she’s saying is that the Treasury can convert fake debt into real debt. This conversion nets out in regards to debt held from an accounting perspective, brings in cash, and then creates an actual obligation on the books vs. a fictional inter-agency obligation.

        Essentially, the SS Trust Fund is a giant credit card.

      2. No it doesn’t. I am not saying that there is money is the Trust Funds. Just that there are assets (legally they are assets) and they can be swapped to get cash to Treasury to pay benefits. It’s different.…..ue-de-rugy

        1. Try the banana stand. ALWAYS money there.

  2. This is singularly unenlightening. So the diver has a little extra capsule of oxygen that will keep him from drowning past 08/02/11. Okay, so when does he really drown? When does the oxygen really run out?

    Also, some of us think that stiffing people who fight, patrol and otherwise work for America of their agreed, lawful and duly authorized compensation counts as a “default.”

    1. But not the sort of default that will make it hard to get loans. Although it might make it harder to get government workers.

      1. That’s a feature, not a bug AFAIC

        1. “AFAIC.”

          Douchebag quintessence.

          What, are you texting this in from a 2005-model cell phone? ROTFLMAO!!!

          1. If the use of acronyms is the hallmark of douchebaggery, that would explain a lot about gov’t (oh dear, forgive me, are colloquially accepted contractions utilized to abbreviate longer words also a primary indication of douchebags?).

            1. If you can’t see the difference between “FBI” and “WDALYIC,” there is no point in trying to educate you.

              1. Oh, Oh, I know this Mr. Kotter!

                The WDALYIC doesn’t break into your house in the middle of the night, shoot your dogs, make your family stand outside in your night clothes, while they rummage through your wife’s private drawer and ridicule her fun toys.

      2. Not so sure.

        I’m not sure if, for instance, McDonalds would have the same credit-worthiness if the front page of the Wall Street Journal reported that its workers would be missing paychecks for the next three weeks.

  3. I don’t care….raise i,t let it blow neither course matters much at this point. They will not fix the problems that underlie the issue. Raise it to 50 tril bfd….let the bond market assfuck congress.

    1. I like the sound of this!

  4. This is singularly unenlightening. So the diver has a little extra capsule of oxygen that will keep him from drowning past 08/02/11. Okay, so when does he really drown? When does the oxygen really run out?

  5. I don’t care….raise i,t let it blow neither course matters much at this point. They will not fix the problems that underlie the issue. Raise it to 50 tril bfd….let the bond market assfuck congress.

  6. Not to pry into Nick’s private life, but he sorta brought up on his own in recent media appearances…but is Veronique his new squeeze?

    1. We’ll look into it. And by “it”, we mean his cell phone.

    2. They’ve been together for a while!

      1. Does she get to wear The Jacket?

    3. What is going on at the Reason offices? First Weigel gets with Howley and now this?

      1. Haven’t you been watching any television series lately. Evidently everyone at work has sex with each other while at work. They don’t do that where I work unfortunately.

        1. That’s because you don’t work with freedom-loving libertarians.

  7. the legislative director of the National Active and Retired Federal Employees

    HEY! Over here!! Found at least one federal job we can eliminate!

    Seriously – WTF?

    1. NARFE!!!

  8. The “intragovernmental debt” thing always gets me.

    One government agency promises to pay another one so it’s seen as public debt, meaning that really you owe.

    Frankly, I consider my portion of the national debt to be zero dollars.

    1. The “intragovernmental debt” thing always gets me.

      If one agency owes money to another agency, should it really count as debt? It sounds more like rearranging assets. Maybe I just misunderstand.

      1. The intragovernmental debt might also be classified as intergovernmental debt. The money could be owed by the EPA to the DOT or it could be owed by the US DOT to a State DOT. Just like a State DOT may owe a County Roads Department. These intragovernmental/intergovernmental transfers hit each entity as debts and credits and are very real things to those people who are owed.

        1. But shrike and Tony said intragovernmental debt are okay, because Timmeh said so!

  9. Debt limits are at odds with true liberalism. Why have such a paternalist artificial restriction on progressivism if its just raised whenever they reach it? Stop smothering government and just fucking let it do itself in.

  10. Fact #obvious: The best prescription for all of the horrors debt fanatics claim to be afraid of is to fail to raise the debt ceiling.

    1. Wow, you guys have even sold Tony.

  11. I’m growing increasing afraid that on August 2, Obama will go on television, wipe off his blackface, and reveal himself to be the joker.

    Introduce a little anarchy. Upset the established order, and everything becomes chaos. I’m an agent of chaos. Oh, and you know the thing about chaos? It’s fair!

    1. Too optimistic.

    2. I envision Barry as more of a Silver Surfer type heralding the impending doom….. Dooooooommmmm…….DOOOOOOOOOOOMMMMM!!

      1. I remember reading some libtard paeon to Obama that compared him to the Surfer: a beautiful, wondrous creature come to change the status quo in his/her words.

        1. I remember reading some libtard paeon to Obama that compared him to the Surfer: a beautiful, wondrous creature come to change the status quo in his/her words.

          Libtards have nothing on bible-thumping fundamentalists when it comes to praising the objects of their worship.

        2. a beautiful, wondrous creature come to change the status quo

          But who’s actually the agent of a nigh-unstoppable all-devouring menace, brainwashed into a being of cold superiority, given vast power, and charged with finding and subjugating fresh, fertile spheres of life which can be drained dry of energy and resources. All to momentarily sate the endless, gnawing hunger of its master.

          Well, now that you mention it…

    3. Removing the blackface and revealing himself to be Jimmy Carter? It’s hard to imagine anyone more an empty suit.

  12. THREAD JACK!!!!

    Local lefty rag with pro HSR article mentions in the third graf but not Tim.…

    Article is a puff piece of course. It doesn’t deal with any the opposition arguments in depth.

    Also their man-on-the-street feature is on this issue and all four people are pro-HSR and give the usual idiotic arguments. Though I cannot find a link for it.

    1. Wow. What a load of crap in that article.

      What will HSR do for ME?

      “HSR will generate rainbow-shitting pink unicorns for your children to ride while you’re experiencing the awesomest orgasm-inducing commute ever known on 5 habitable planets!”

      1. It’s not unlike the shills from the traveling medicine shows of the 19th century. I wouldn’t be surprised if the “man on the street” feature was comprised of the mag’s summer interns.

    2. Now that’s glib.

    1. Do the Pixies have a song that’s just the sound of crickets chirping, and the video is just tumbleweeds rolling past?

    2. With 87 songs in the Pixies canon, I wonder which songs heller will repeat to get to 100.

      1. black frank did some solo work after the Pixies…

        also i am sure there are some live covers that they preformed.

        1. Frank Black don’t count.

          And with live versions and covers, you only get up to 98, I believe.

          1. That’s 99 too many

          2. But the Breeders damned well should.

            1. Breeders > Pixies, so they shouldn’t count as Pixies songs. That would be cheating.

              1. Particularly since the primary reason Pixies broke up was that Frank Black wouldn’t do any of Kim’s songs.

  13. “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.”

    Provided, of course, you can get a good number of further suckers (like shriek, for instance) who will buy more bonds to pay for the other bonds which are to be redeemed in order to dole out money to old people who were not diligent enough to save their own money.

    Yeah, the system works.

  14. Fact #4 – Means-testing Social Security and Medicare is looking better and better .

    1. “Means Testing” is simple English in describing a true welfare program.

    2. Means testing would reveal SS & Medicare as frauds.

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  16. According to Treasury Secretary Timothy Geithner, the U.S. government will reach its legal borrowing limit?the debt ceiling?on August 2.

    No. We hit the debt ceiling on May 16th. Why lie about the most basic facts on this?

    1. Because Obama’s having a bit more trouble putting the DOOM! hat on Team Red than he expected.

      1. RRR,

        ???So that’s why Reason lies???

        1. Re: Neu Mejican,

          ???SO that’s why Reason lies???

          Your very own quote above says “According to TREASURY SECRETARY TIMOTHY GEITHNER…”

  17. A gimmick is a gimmick. Politicians playing with our “full faith and credit” discredit our country. It is Russian roulette and I do not like it!

    Paul Hines

  18. No. We hit the debt ceiling on May 16th. Why lie about the most basic facts on this?

  19. Just as all know, our country is the least debt, for most of us don’t want a debt.

  20. I wonder if reason would do a piece on Phil and Wendy Gramm, reagonomics, Enron, Clinton, Rubin, Sumners, Mercatus…de Rugy, but not necessarily in that order. Just wondering what their take would be on the relationship between Enron, Wendy Gramm, and Mercatus, besides the fact that Gramm was an executive at Enron and is a distinguished senior scholar at Mercatus. Not that there’s anything wrong with that.

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  27. “Now a full default may wipe all Treasuries out – in that case we old fuckers are in Mad Max land.”


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