As things currently stand, the United States government will lose its legal authority to borrow money on August 2, 2011. With this deadline drawing near, Social Security recipients are among the many groups of Americans who are wondering how this issue will impact their lives and more specifically, their monthly benefits. Should Congress fail to pass a plan to avoid default on the federal government's financial obligations, it is possible that benefits payments due in August (totaling $23 billion) will not be made on time.
In order to understand this issue and the potential impact on Social Security benefits payments, it is helpful to understand the background of the Social Security trust funds,
as well as how income to the funds is invested over time.
The funds used to make Social Security payments reside among two large trust funds - one for Old-Age and Survivors Insurance (OASI) and one for Disability Insurance (DI). Legally, the funds are separate, but they often are described collectively as the OASDI Trust Funds. While in total the federal budget includes more than 200 trust funds, the OASDI fund is among the largest, at a total of $2,609 billion at the end of 2010. The Secretary of the Treasury is the managing trustee of the Social Security trust funds. So, all Social Security payments are made from the U.S. Treasury.
By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities
held by the trust funds are "special issues" of the United States Treasury. Such
securities are available only to the trust funds. As tax income is deposited into the trust funds on a daily basis, it is invested in these special issue securities and the cash exchanged for the securities goes into the general fund of the Treasury and becomes indistinguishable from other cash in the general fund.
In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities, on the other hand, are subject to market forces and suffer losses or enjoy gains if sold prior to maturity. Theoretically, investment in special issues gives the trust funds the same flexibility as holding cash.
That said, in order for the special issues to be redeemed for "cash," they must be purchased by the U.S. Treasury. Then, the U.S. Treasury can sell the bonds to the public. However, if the debt ceiling is not raised, the U.S. Treasury will not have sufficient funds to purchase the bonds from Social Security in the first place, meaning the bonds could not be turned into cash and used to make monthly payments to beneficiaries.
Given the uncertainty around how and when this issue will be resolved by Congress, disability beneficiaries and health and welfare benefit plans should prepare for the possibility that Social Security checks will not be distributed as planned on August 3. For beneficiaries who rely on this income, this obviously means planning for a possible interruption to that income. For health and welfare plans, on the other hand, it means advance planning to handle the anticipated influx of inquiries from beneficiaries, as well as determining how to navigate the application of Social Security offsets.