The government shutdown has gone on for more than a week, quashing initial hopes that any disruption from Washington's closure would be short and insignificant. Now, attention is turning to the potential breach of the debt ceiling, which has much more dire implications for the well-being and livelihood of the 57 million Americans who rely on Social Security. As the debate intensifies, Social Security recipients have reason to fear that they could see an interruption in much-needed benefits if the debt ceiling isn't raised.
Washington gridlock and the chaos that has ensued
The shutdown has furloughed hundreds of thousands of government workers, and the collateral economic damage from the closure has affected millions of other Americans. Government contractors in particular have had to take steps that have hurt their workers in light of the shutdown. Last week, United Technologies (UTX +0.05%) said it could have to furlough as many as 5,000 of its own workers if the shutdown continues. Similarly, Boeing (BA +0.47%) announced its own set of slowdowns and expected furloughs in light of its defense-contract exposure. Thus far, though, the shutdown hasn't had a major impact on Social Security recipients, as they've still been able to apply for benefits and receive their monthly benefits as essential government services.
But the debt ceiling raises bigger concerns for Social Security. Earlier this week, President Obama said, "In a government shutdown, Social Security checks still go out on time. In an economic shutdown, if we don't raise the debt ceiling, they don't go out on time." The Social Security Administration has reportedly started notifying recipients that a failure to raise the debt ceiling would put Social Security benefits at risk.
Is a debt-ceiling disaster unavoidable?
As dire as those calls sound, though, it's not entirely clear whether hitting the debt ceiling would automatically mean that Social Security payments would have to stop. Some experts point to the fact that Social Security funding is mandatory, giving it priority over the discretionary spending over which Congress has more direct control in its budgeting process. That fact has kept payments flowing even during the shutdown, and some argue that it would justify even what some would see as an illegal debt-ceiling breach to keep them going.
Another argument in favor of continued benefits is that Social Security has its own dedicated funding source. Payroll taxes and self-employment payments come in on a regular basis, and employers and self-employed workers make those payments specifically as Social Security taxes. Diverting those taxes to other purposes, such as paying interest on Treasury securities, isn't technically allowed, as Social Security Trust Fund assets must be used for Social Security. Moreover, any end-run around those requirements would have negative political ramifications that lawmakers would likely prefer to avoid. Indeed, a default on Treasuries might be politically easier to stomach than punishing millions of retirees who constitute a key voting bloc for lawmakers seeking reelection.
Most of the Social Security program's income comes from payroll tax revenue. Source: Social Security Administration.
Yet the political stakes have risen so high that keeping hot-button issues like Social Security on the table has value in providing leverage for lawmakers' arguments. The chart below shows the extent to which those aged 65 and older have come to rely on Social Security as a major source of income. As a result, the threat of a Social Security disruption has been an essential part of the debt ceiling debate, regardless of whether it would actually come to pass.
As this chart shows, Social Security has become an even larger part of total income in the past 50 years for those aged 65 and older. Source: Social Security Administration.
Keeping on schedule
The Treasury has said that it expects the government to hit the debt ceiling around Oct. 17. If the SSA stopped making benefits payments, that date would potentially create a divide among Social Security recipients.
Currently, Social Security recipients get paid on different days of the month based on their dates of birth. For those born between the first and 10th days of the month, benefits are paid on the second Wednesday of the month, which is today. Those born between the 11th and 20th days of their birth month will get paid next Wednesday, while those born from the 21st to the 31st are scheduled to receive their benefits on Oct. 23. Thus, that third group of recipients could end up without an October payment in a debt-ceiling breach. A longer crisis could affect others in their November payments.
In the end, who suffers most from hitting the debt ceiling will depend on how the government prioritizes its limited financial resources. Big government contractors aren't likely to get hurt substantially in any event, as they have the reserves to make it through any payment delays unscathed. United Technologies had $4.9 billion in cash on its balance sheet as of June 30, while Boeing had more than $14 billion in cash and short-term investments. By contrast, many Social Security recipients live check-to-check. Yet despite the dire consequences for its recipients, until the government actually figures out those priorities, it's impossible to guarantee that Social Security will be immune to the debt-ceiling debate.
Tune in to Fool.com for Dan's regular columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.
