Several days ago, President Obama made headlines and, no doubt, scared a lot of America’s senior citizens with his statement there is no guarantee that Social Security checks (or many other government checks) will be sent out if the debt ceiling is not raised.
Presumably, those not getting government payments would also include federal employee retirement payments and, possibly, many current federal employees.
To put this into perspective, here are two comments from the president:
“So are we really going to start paying interest to Chinese who hold Treasuries and we’re not going to pay folks their Social Security checks?”
— President Obama, June 30, 2011
“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”
— President Obama, July 12, 2011
The latest statement is, in part, a way to put political pressure on Republicans that are not giving the president the legislation he wants to continue business as usual. We have no way of knowing what will really happen if there is a technical default while the politicians try to work out an agreement on the debt ceiling.
FedSmith has attempted to find out from the Office of Personnel Management about the status of the money that federal employees pay for their federal retirement. Despite verbal assurances an answer would be forthcoming, we were never able to obtain information from the agency. We resorted to submitting a Freedom of Information Act request to OPM but, to date, they have ignored this as well.
Based on reports from previous administrations, it is reasonable to conclude that there is very little money, if any, in a retirement fund for future retirement payments to be paid to federal employees. As with Social Security, the fund is essentially full of “IOU’s” from the government as the money is spent as it comes in to pay for current government expenses.
In other words, the money that is actually paid each month to federal retirees comes from current government receipts. There are not billions of dollars sitting in an account waiting to be disbursed. This is essentially the same situation as exists for Social Security (See No Money in the Social Security Trust Fund).
Understandably, for those that have been paying attention, this creates the same anxiety and insecurity among federal retirees that is felt by those who may be depending on Social Security payments each month to pay their bills.
Here is a quote in a column published on July 14th by Karl Rove:
The $172 billion in revenues collected over the rest of the month can pay the $29 billion interest charges on the national debt, Social Security benefits ($49 billion), Medicaid and Medicare ($50 billion), active duty military pay ($2.9 billion), Department of Defense vendors ($31.7 billion), IRS refunds ($3.9 billion), and about a quarter of the $12.8 billion in unemployment checks due that month.
There will, however, be no cash for highway construction, no checks for federal workers or retirees, no agriculture payments, no open national parks. Interest rates are also likely to rise if U.S. debt is downgraded, adding massively to the deficit and further damaging the economy. This would be a disaster with no political winners.
There is apparently legal authority for the federal government to continue to pay Social Security benefits even if the debt ceiling has been reached. During the 1996 debt limit crisis, Treasury Secretary Robert Rubin said that the Treasury Department did not have sufficient funds to pay Social Security benefits. Later that year, Congress passed public law 104-121. It put into law the Treasury’s authority to use Social Security trust funds to pay benefits and administration expenses in the event a debt ceiling is reached. This law would presumably give the administration the authority necessary to pay Social Security benefits even if the debt ceiling is not raised.
Whether the administration would do so, or whether it would withhold the checks to create political pressure, is anyone’s guess.
Federal employees and retirees are not in the same situation. We do not know if the Treasury Department would redeem the notes for civil service securities to pay retirement benefits or if there would even be a viable market for these notes if the debt limit is not raised.
The Civil Service Retirement and Disability Fund provides benefits to retired and disabled federal workers covered by the Civil Service Retirement System. This money is invested in special-issue Treasury bonds. The federal government is already borrowing money from this source to keep the government running despite its massive debt. Under a 1986 law, the Treasury Department can (and has) stopped investing new employee and agency contributions, along with interest earnings on existing investments and income from maturing securities. Also, Treasury can redeem income of about $6 billion per month in existing securities ahead of schedule. (See What Happens to Your TSP Funds If the Debt Limit is Not Raised? and Debt Ceiling Reached But Sky Isn’t Falling on Thrift Savings Plan Investors.)
Bluntly, the money contributed by federal employees has already been spent. Chances are, if the administration decides not to issue Social Security payments, federal retirees won’t get paid either. Paying former federal employees while not issuing Social Security checks to millions of Americans would be unpopular.
And what about payments to currently employed federal workers? No one knows or, if they do know, they are not issuing public statements. There could be some federal employees who do not get a paycheck. 52 House Republicans sent a letter to the White House this week demanding that military pay, as well as Social Security checks, Medicare payments and all interest payments, remain unaffected if a deal on the debt is not reached. Note that this does not include a request to continue to issue federal retirement payments or payments to current federal employees. There is also legislation introduced this week to pay military personnel if no agreement is reached on the debt limit.
Some agencies, or some programs in federal agencies, could also be impacted if the federal government is required to spend only what it receives in revenue each month. Presumably, some federal employees would not get paid—at least not on their regular pay dates. This is a new version of a government shutdown and how it would be implemented or the final impact on federal employee pay is not known. (See After the Shutdown: Will Federal Employees Get Paid?)
The situation is fluid. Chances are, some agreement will be reached as the leaders of both political parties want to avoid the chaos and political fall-out that will ensue when the government decides who gets paid and who does not get paid. But, to be realistic, if you are living “close to the margin” and just barely getting by despite getting a federal check each month, you may want to seriously consider how to cut back on some expenses if that becomes necessary while the political debate rages about how (or if) our federal government will reduce spending or deal with our inability to live within our revenue limits.