In a column at RealClearMarkets, Josh Barro cuts through the hype about the debt ceiling, and walks through the options the government has available to it in the event that Congress drags its feet (or refuses) to raise it.
A key option regards a raid of entitlements:
The most financially promising of those options would be to “disinvest” government trust funds that hold Treasury debt, most principally the Social Security Trust Fund. Essentially, the trust funds would redeem bonds they hold ahead of schedule, in exchange for a promise to be paid back later — and such an IOU would not count against the debt limit. Because the trust fund balances exceed $2.5 trillion, this tactic could be used to run the government for several years without hitting the debt limit.
This tactic works because the debt limit applies to gross debt, including trust fund holdings, which are debts the federal government owes to itself. The government’s true indebtedness is better reflected by net debt, also called Debt Held by the Public. By reducing the amount of debt that the government owes to itself, the federal government can grow the net debt while staying within the gross debt cap.
The Reagan Administration used this tactic during a budget standoff in 1985; while the AARP sued to block the raid on the Social Security Trust Fund, their suit was dismissed. However, Reagan used the proceeds of the raid to pay current Social Security benefits, and it may not be legal to raid the funds to pay for general operations of government. A raid would also be politically fraught; while the Social Security Trust Fund is an accounting fiction, most Social Security beneficiaries don’t see it that way.
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