Wednesday, May 11, 2011

The Debt Limit, Social Security, and the Republicans’ Negotiating Hand

For all the tough talk coming from the Republicans in Congress, including Speaker John Boehner's May 9 address to the Economic Club of New York, a look at the calendar and the schedule for Social Security payments suggests that the Republicans negotiating strength is not as strong as they are suggesting.

The largest dollar amount of Social Security benefit payments hit the Treasury's account at the Federal Reserve on the third of the month if that is a business day. Electronic fund transfers for those who filed for Social Security benefits prior to May 1, 1997 are made on that day. The current amount of payments for the third day of the month is nearly $22 billion. Other important Social Security payment dates are the second, third, and fourth Wednesdays of each month. Those who filed on or after May 1, 1997, are paid on those days, depending on the day of the month they were born. The transfer for Social Security benefits out of the Treasury's account for each of these three Wednesdays is running currently at a little over $9 billion.

In his May 2 letter to Congress, Treasury Secretary Geithner indicates that, using some accounting stratagems relating to the debt subject to limit, Treasury will likely have enough cash to meet its obligations until August 2. If Congress has not passed an increase in the debt limit by August 2, it will be under enormous pressure to do something, if only a temporary or a small increase in the debt limit, so that Treasury can rush out a cash management bill in order to have enough cash to pay Social Security benefits.

If there is no political compromise on budget issues and a permanent and sufficiently large increase in the debt ceiling is not enacted, one can see this scenario playing out each time the Treasury is running out of cash and a large payment is due the following day. The other big payment day in August besides the four Social Security payment days is the 15th, when interest is to be paid on Treasury notes and bonds with semiannual coupon payment dates of February 15 and August 15. On February 15, the amount of interest paid was $29.7 billion.

Given how politically unrealistic Speaker Boehner's demands are, it looks increasingly likely that the debt limit impasse will continue to the brink, and there is even the small possibility that Social Security payments to be made on August 3 will be delayed. One would think that would be political poison for the Republicans no matter how hard they would furiously attempt to place the blame on the Administration.

If no compromise on budget issues is reached with the Administration, it is unclear how long the Congressional Republicans will want to prolong the debt limit impasse. Small or temporary increases in the debt limit will mean more difficult votes. The political reality is that the Republicans cannot achieve through debt limit legislation large spending cuts unacceptable to the Administration.

Unfortunately, the uncompromising talk on the debt limit will no doubt make some investors nervous as each big payment date approaches.

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