Truth From The Treasury Secretary: Social Security at Risk

There is usually a lot of happy talk by government about Social Security that centers around the theme that the Social Security Trust Fund has plenty in reserves. But it should be remembered that the Fund now operates cash flow negative, which means it needs to liquidate part of those reserves to fulfill its payment obligations. What do those reserves consist of? Treasury securities. That means that the SS must redeem some of its Treasury securities to raise the cash. But the Treasury has no surplus cash for such redemptions, it needs to go to the debt markets to raise cash. As interest rates climb, this will become more expensive to do, especially as the amount of cash demanded by SS and other entitlement programs begins to soar. It will be a mess.

Treasury Secretary Lew revealed part of this truth today when he spoke in Mountainview, California and discussed the debt ceiling. (My bold)

Even a delay of a necessary increase in the debt limit can bring harmful consequences. Keep in mind, the receipt of tax revenues and the outflow of expenditures are inherently unpredictable. So it is not possible for us to estimate with exact precision when Treasury will have to depend exclusively on cash on hand to meet our country’s commitments – or how long it will take before that cash runs out. If cash on hand were to be depleted, all payments across the government -- including Social Security and payments to our military and veterans -- would be at risk.

He is only talking here about the problems that political gamesmanship between Democrats and Republicans might temporarily cause in the Treasury selling debt. But the danger is the same, if not greater, when markets won't allow the Treasury to raise funds at cheap rates. It will mean cutbacks in Social Security and other entitlement programs or it will mean the Federal Reserve stepping in and printing more money to buy the Treasury securities that no one else will want. Either way, it won't turn out well for the retirees who depend on Social Security, either there will be immediate cutbacks or price inflation will cut into the purchasing power of the payments. It won't be pretty. Don't say the Treasury secretary didn't hint about the problem.