Update: if Debt Ceiling deal collapses X-Date is 6/8

The 36b Social Security Trust Funds true up payment due to strong tax receipts in 2022 is the culprit

TLDR

If DC deal collapses

·         X-Date is probably 6/8

·         Announcements of debt auctions for 6/6 and 6/8 should signal how Treasury would deal with it

Happy Memorial Day!

The X-Date as I have been describing it is likely to be 6/8. Wait John, you sure your last name isn’t Kerry circa 2004, we are getting whiplash here. What happened since Friday to change your mind?

Recall from my Friday update (where I projected, deal notwithstanding, X-Date not likely in June) that I laid out 3 scenarios that would alter my analysis including:

2.       There could be negative debt issuance on 6/6 or 6/8? Why would that happen? Well Treasury might need to counterbalance net payment flows into the govt trust funds that week to keep the debt at the limit. Treasury should have some cushion to absorb these payment flows because of the Social Security payment outflow on 6/2 (which will create remaining EM that will then be absorbed by trust fund payment in flows the next week). But that cushion may not be enough for the week, and if it is not, I think Treasury would have to absorb that payment flow by negative bill issuance on 6/6 or 6/8 and that would correspondingly reduce the TGA on 6/9. If it isn’t moot with a DC raise, the Treasury auction announcements next week (for week of 6/5) will tell that tale. Since I have very little visibility into what these payment flows have been/thus likely to be (only the month or so of what Treasury has released in the EM reports Friday afternoon) this is the most likely reason my analysis would be wrong.

Pesky 36b SS Trust Funds true up payment

Secretary Yellen’s letter to Congress Friday afternoon highlighted one such “payment” that week, a particularly large one…

“a regularly scheduled quarterly adjustment that would result in an investment in the Social Security and Medicare trust funds of roughly $36 billion”

Just what (and when) is that “payment”?

The answer starts in 42 U.S. Code § 401 - Trust Funds (https://www.law.cornell.edu/uscode/text/42/401)

This statute establishes the social security (and Medicare part A) trust funds and describes how the taxes collected for social security and Medicare are transferred into these funds. With simplicity as a north star, (a first principle for good engineering) one might think it just passes through taxes as they are actually collected into the Trust Funds. One would be wrong, what is actually mandated is for Treasury to

1.       Estimate what the taxes collected will be, “pay” that into the trust funds, and then

2.       True it up to actuals at a later point.

In the language of the statute,

The amounts appropriated by clauses (3) and (4) of this subsection shall be transferred from time to time from the general fund in the Treasury to the Federal Old-Age and Survivors Insurance Trust Fund, and the amounts appropriated by clauses (1) and (2) of subsection (b) shall be transferred from time to time from the general fund in the Treasury to the Federal Disability Insurance Trust Fund, such amounts to be determined on the basis of estimates by the Secretary of the Treasury of the taxes, specified in clauses (3) and (4) of this subsection, paid to or deposited into the Treasury; and proper adjustments shall be made in amounts subsequently transferred to the extent prior estimates were in excess of or were less than the taxes specified in such clauses (3) and (4) of this subsection.

This 36b “payment” is the true up for last year’s bumper crop tax season. More actual taxes were collected than expected and this 36b will make the trust funds whole. You can see the history of the expected payments and the truing up to actuals (typically occurring primarily in June) here

https://www.ssa.gov/oact/progdata/taxquery.html

Great, but that site just shows the big true up “Adjustment for actual wage data” being in June (though notably also December last year), precise timing matters for the X-Date, when exactly is it in June?

Unfortunately, I can find no official schedule or announcement (beyond Yellen’s letter) of the timing of this “payment”, but a little data sleuthing (see appendix A for the analysis technique) into the early June Daily Treasury Statements from the past 2 years reveals that “payment” date to almost certainly be June 8^th

“Payments” to Trust Funds

Ok john, something is bugging us, whats with the quotes around “payment”. Its getting annoying, please explain.

If you recall from my article last Wednesday on extraordinary measures, “payments”  into the govt trust funds (including the social security and Medicare funds) do not involve the transfer of cash from the TGA. Rather, they result in Treasury issuing additional (in the payment amount) government account series treasuries for the trust fund. This is a key point. This 36b dollar “payment” is not initially a cash flow problem for the Treasury on 6/8 as it doesn’t have to transfer in 36b of TGA cash (which it likely wont have on that date). Instead it’s a debt limit problem; Treasury very likely wont have 36b in remaining extraordinary measures on 6/8.

X-Date is June 8th

Some remaining EM headroom will likely open up on 6/2 as the social security payments go out, though it will also likely be at least partially maybe mostly consumed early in the week of 6/5 by other regularly scheduled payments into the trust funds (expected/non true up social security and Medicare payments as well as other govt fund payments). With the little visibility that I have into the history of those trust fund day to day “payments” its impossible for me (but not Treasury and Secretary Yellen very specifically states “Therefore, our projected resources would be inadequate to satisfy all of these obligations” in her letter) to know for sure but its almost certain that there wont be anywhere near 36b in available EM on that date.

What is Treasury to do? Well, since June 8^th is a day of treasury bill issuance/redemption. Treasury could allow 36b more in bills to redeem vs. issue. That would free up the space under the limit. The problem there of course, is unlike using extraordinary measures, doing that involves paying out 36b more in TGA cash than they take in that day. 36b of cash they wont have. So Treasury cant do that absent default.

So regularly scheduled payment meets inability to make it, even if that payment is in the form of govt. account series treasuries that the Treasury cant issue due to the debt limit. I think that sufficiently meets the definition of the X-Date. Thus my back and forth conclusions of my analysis “unlikely in June”, “likely in June”, “unlikely in june”, finally settles on “likely in June”, specifically June 8.

What if Govt dysfunction wins out and deal falls through?

But what if D.C. dysfunction prevails, the current deal falls through and the limit has not been raised or suspended prior to 6/8 can Treasury just delay the true up payment a week until after the mid June tax receipts?

Probably not. While delaying the “payment” wouldn’t violate  42 U.S. Code § 401, since it only requires Treasury to true up the trust funds vs. actuals but says nothing about specific timing of those “payments”,  assuming 6/8 is the normal timing for depositing the true up into the social security funds, it would seem like a clear violation of 42 U.S. Code § 1320b–15

(a)In general

No officer or employee of the United States shall—

(1)delay the deposit of any amount into (or delay the credit of any amount to) any Federal fund or otherwise vary from the normal terms, procedures, or timing for making such deposits or credits,

(2)refrain from the investment in public debt obligations of amounts in any Federal fund, or

(3)redeem prior to maturity amounts in any Federal fund which are invested in public debt obligations for any purpose other than the payment of benefits or administrative expenses from such Federal fund.

There could be a Hail Mary in (3) however, as posited by the Concord Coalition back in February (https://www.concordcoalition.org/wp-content/uploads/2023/02/Social-Securitys-Debt-Limit-Escape-Clause.pdf)

Unlike previous episodes in which the Treasury could redeem debt held by the Social Security trust funds and borrow an equivalent amount from the public to pay benefits on the third day of each month, benefits are now paid throughout the month.[21] To ensure every Social Security beneficiary is paid on time, and the benefits are cleared through the banking system, the government would need to ensure the Treasury General Account (TGA) is never overdrawn. One way to achieve that result would be to redeem enough Social Security trust fund debt to cover all the government’s bills each month.

Given the current balance in the Social Security trust funds ($2.8 trillion), the government would be able to ensure the payment of Social Security benefits – and fund the rest of the government as well – for a considerable period without increasing the debt limit.[22] Admittedly, Congress did not intend this result when it limited the disinvestment of the Social Security trust funds to the purpose of paying benefits. However, the Treasury has suggested that it lacks the ability to selectively pay some bills and not others (except perhaps principal and interest on the debt as noted above). If this is true, then one way to ensure Social Security benefits are paid on time – as Congress intended – is for the Treasury to pay all its bills on time.

As long as there is a positive balance in the Social Security trust funds, the Treasury Secretary has both the authority and the obligation to pay Social Security benefits. Even though Congress intended to prohibit the use of the trust funds to circumvent the debt limit, Congress also intended to allow the disinvestment of the trust funds when necessary to pay benefits. If Congress fails to increase the debt limit before the traditional extraordinary measures have been exhausted, the Treasury will be forced to choose between two conflicting priorities. Disinvesting the trust funds could have the unintended effect of implicitly creating another extraordinary measure to temporarily fund the government until the debt limit is increased; whereas the failure to disinvest the trust funds could have the effect of delaying the payment of Social Security benefits.

If Treasury did redeem debt in the social security trust funds early (say in the amount of 36b to offset the debt limit impact of the true up payment). It would buy them the time to mid-June and then ultimately to late July. Would a Federal court strike that maneuver down if an aggrieved party with standing filed suit? Maybe (even probably), but almost certainly not before the mid-june tax receipts. Seems a reasonable “break glass in case of emergency” course for the couple of days of breathing room Treasury would need and less politically fraught then invoking the 14^th amendment or minting some trillion dollar coin.

Whatever the story is going to end up being, the key data to look at this week I think is the Treasury’s bill issuance announcements on Tuesday and Thursday for the next weeks (6/6 and 6/8) issuance. With the issuance announced through 6/1 and the expected withdrawal and deposit cash flows, there would be enough cash to make it through the week of 6/5. There is just seemingly not enough debt limit to do it (and handle the true up payment). If the announced net issuance on those days is flat or positive, then Treasury may well be engaging in the Hail Mary. If the net issuance is significantly negative, then some curtailed payments would be likely starting 6/1 to provide enough of a cash balance to cover the negative issuance on 6/8 (because I just cant imagine a scenario where Treasury would allow default on redeeming a maturing bill). Of course if the debt ceiling deal becomes law this week, expect a large positive net issuance the next week.

I expect this will be my last post on debt ceiling and extraordinary measures for a while (until the ceiling needs raising again), though I intend to continue to hone my model and daily project Treasury deposits and withdrawal flows and TGA levels though my twitter account. For those who started reading this blog because of the debt ceiling, I hope you will stick around. If not, I genuinely appreciate your time and attention over the past few weeks.

Best,

John

Appendix A

In June 8th 2021 Daily Treasury Statement, ~37b more Government Account Series treasuries (the sort the SS trust funds hold)  redeemed than were reissued that day, greatly exceeding the smallish corresponding withdrawal flows from the trust fund accounts that day.  In June 2021 the trust funds owed 44b to Treasury due to 2020 actual collections (thanks covid) being less than the expected payments that were paid into the SS trust funds.

For June 2022, Treasury owed the trust funds ~13b in true up. On June 8^th DTS we can observe an unexpectedly level amount of Govt Account Series treasuries redemptions only dropping 2b on the day. This despite the fact that 23b of SS payments went out that day. Most of that difference is explained by Treasury issuing 13b in true up “payment” government account series treasuries to the SS trust funds that day.