The Corner

The Problem with Prioritizing Payments

Tomorrow, Sen. Pat Toomey (R., Pa.) will introduce a bill to require the Treasury to prioritize payments to creditors, military families, and Social Security beneficiaries in case the debt ceiling isn’t raised by August 2.

But a former Treasury official warns National Review Online that prioritizing interest payments may not prevent the U.S. from defaulting on its debt.

The problem is much of our debt is short-term, so before a portion of it becomes due, the Treasury has to borrow more money to pay it back. Although these transactions occur quickly, they’re not instantaneous: The moment the Treasury borrows the money necessary to pay its latest claimants, the total amount of outstanding obligations can exceed the debt limit.

In return, the official suggests Republicans authorize the Treasury to borrow more money for limited purposes, such as interest payments, just for the month of August — “or something like that” — to ensure the U.S. avoids default. (Our own Kevin Williamson suggested something similar a few weeks ago.)

Then there’s Social Security. If Tim Geithner lacks the cash to meet all obligations on August 2, the former official explains how the Treasury secretary can finagle it: Say the Treasury owes $50 billion in Social Security payments, but has only $25 billion in cash on hand. Because the Social Security Trust Fund holds billions of dollars in federal IOUs, it can go to the Treasury, redeem $25 billion worth of these securities, and thereby decrease the total debt by that amount. That allows the Treasury to borrow an additional $25 billion, pay the remaining beneficiaries, and thus meet all its obligations.

For Social Security, that is. This accounting trick “doesn’t work for something that doesn’t have a trust fund,” the former official says. Like Medicaid?

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