According to recent reports, the president is considering whether to invoke the 14th Amendment to the Constitution to avoid defaulting on our national debt. The 14th Amendment states, in the relevant part, “the validity of the public debt of the United States, authorized by law, … shall not be questioned.”
Some people think the debt limit is unconstitutional because exceeding the limit would raise questions about the validity of the debt. But invoking an untested theory regarding the meaning of the 14th Amendment — after many decades in which Congress’s authority to impose a statutory debt limit has been accepted — would be a legal long-shot at best. It would certainly be challenged in court, resulting in uncertainty over the validity of any debt issued before the Supreme Court could decide the case.
However, without resorting to the 14th Amendment, there is a statutory debt limit “escape clause” that has gone unnoticed.
The debt limit applies to two categories of debt: debt held by the public and debt held by government trust funds. When the combined amount reaches the limit, the Treasury Department can temporarily redeem debt held by the trust funds and borrow an equal amount from the public without exceeding the limit. This exchange is one of several transactions, collectively referred to as “extraordinary measures,” that the Treasury is currently using to temporarily postpone a default.
The Treasury Department is authorized to redeem debt held by the Civil Service Retirement System and the federal employee’s Thrift Savings Plan. Trust fund programs like Social Security, Medicare and military retirement are not on the list of extraordinary measures. However, the Treasury secretary is not required to invest these trust funds when they are needed to meet current withdrawals. Thus, redeeming them to pay scheduled benefits is allowed.
How much trust fund debt could be redeemed? Assuming the Treasury Department had the ability to prioritize payments, it could redeem just enough to cover Social Security and other payments made from the trust funds. But if the Treasury cannot or will not prioritize some payments over others, to be sure all trust fund obligations are paid in full and on time and cleared through the banking system, the government would also need to ensure the Treasury general account is never overdrawn.
Consider this analogy: You deposit $2,000 in your checking account to pay the rent, but the bank clears a $200 check your spouse wrote for groceries first, so your rent check bounces. One way to avoid this result would be to redeem enough trust fund debt to cover all the government’s bills each month. In other words, deposit $2,200, rather than $2,000.
Given the current balance in all the trust funds ($5.9 trillion), the Treasury Department would be able to make trust fund payments — and fund the rest of the government as well — for a considerable period without increasing the debt limit.
As long as there is a positive balance in the trust funds, the Treasury secretary has both the authority and the obligation to make scheduled trust fund payments. Even though Congress intended to prohibit the use of the Social Security and Medicare trust funds to circumvent the debt limit in 1996, Congress also intended to allow the trust funds to be redeemed when necessary to meet current withdrawals.
If Congress and the White House fail to increase the debt limit before the traditional extraordinary measures have been exhausted, the Treasury secretary will be forced to choose between defaulting on legally binding trust fund obligations, as well as other obligations, or using the debt limit escape clause.
Steve Robinson is chief economist of The Concord Coalition.