Senior Citizens, the Debt Ceiling, and the National Budget.

As our elected officials continue to struggle with the government shut down, a bigger demon is lurking behind them, and behind us.  While essential services continue during the government shut down (though some delays may occur in benefits as time increases), a failure to have funds to pay the nations bills could have a more profound effect on these essential services.

Technically speaking a default will occur when the government can not, or does not, make regular payments to bond holders for borrowed money.  But even if these payments are made there can be catastrophic consequences in terms of benefit payments, availability of services, and both the national and world economies.  It appears there will be enough money to make interest payments to bondholders for November but there will not be enough money to pay those bills and to make payments for social programs, like Social Security and Medicare, and to pay soldiers, civilian staff, and other liabilities. 

What order will other bills be paid?  Unfortunately it is not a simple question and is indeed new territory for our nation.  The decision will not be as clearly defined as it is for the shut down.  Strategies have been introduced to suggest a method to prioritize payments but each has problems and none has been widely accepted as feasible.  During the shut down, funds are available in the budget for all programs.  If a debt ceiling solution is not reached then money simply will not be available and the government will not be authorized to borrow more.  The government, in effect, will be living pay check to pay check incurring more bills than it is able to pay.

The Treasury Secretary is scheduled to address the debt ceiling and the prioritization of bills when he testifies in front of the Senate on Thursday, which has been dubbed by some press organizations as "prioritization day".

The Treasury Department maintains that even if some prioritization agreement could be reached it is not technically feasible to implement.  Government computer systems are programmed to automatically make payments as they come due.  With millions of checks issued each day and with aging technology, choosing which bills to pay and which to hold just isn't possible.  If there is not enough money to pay the bills, all checks would continue to be printed and mailed but some will bounce.  It might be a Social Security check, a pay check, or an interest payment.  There is one way the Treasury could have some control over what is paid. The Bureau of the Public Debt could make payments to bond holders while the automated system for paying bills is simply turned off, however, this does not address how any other payments will be made.

There are legal issues as well.  There is no legal order for the payments to be made.  It is unclear if the Treasury has the legal ability to make those decisions.  Does Congress need to approve each payment?  Can the President decide without input Congress or the Treasury?  There are just no clear answers.

The most likely scenario is that the Treasury will turn off the automated payment system and will pay bills as they accumulate enough cash to make all of a given days payments.  For example, the payments due to be paid on November 1, 2013 (including Social Security) will be paid when the Treasury has enough cash to cover all of the payments due on November 1.  That might be on November 2, or 4, or 10, or 30.  The automated system will make payments as they come due, as it is designed, and will be switched off again until enough cash is available to make the payments due the next day.  This solution allows the Treasury system to function without significant adjustments and also removes the responsibility of deciding what to pay for.  No services will be cut but payments for all programs will be delayed.

It is important to remember that borrowed money accounts for about one third of the money spent each month.  Money will continue in to the government every month even if a debt ceiling agreement is not reached, but those funds will not be sufficient to pay everything.  While there may be a delay in payments for a few days for November 1, 2013, payments due November 30, 2013 may be delayed by a week, a month, or more.

While I can not provide specific answers regarding social programs and the debt ceiling, I can caution you to be aware of the possibilities and to have a back up plan in place.