Debt Ceiling: Treasury Secretary Jack Lew says prioritization of payments may not be possible & won’t avert default

Treasury Secretary Jack Lew testified before the Senate Finance Committee on the debt limit on Oct. 10, 2013. SOURCE:

Treasury Secretary Jack Lew warned lawmakers that prioritizing some payments over others – such as paying debt interest – in the event that Congress fails to raise the debt ceiling may not be logistically possible given how the federal payment system is designed.

“There is no way to make our federal payment system work well to pick and choose what we pay. So we’re going to be in a place which is uncharted territory…It would not work smoothly. It would be chaos,” Lew testified before the Senate Finance Committee yesterday.

Read more: Transcript: Testimony of Treasury Secretary Jack Lew on the debt ceiling – Oct. 10, 2013

Unless Congress votes to increase the debt limit by Oct. 17th, the Treasury will run out of cash to cover all of the bills – such as debt interests, Medicare reimbursements, Medicaid payments to states, Social Security benefits to seniors, veterans’ benefits, and salaries of military service members – that Congress previously authorized, resulting in an unprecedented default in the nation’s 224-year history. The economic consequences of a government default would be “catastrophic”, according to the Treasury.

However, some Republicans lawmakers – particularly those who are using the debt ceiling to exact concessions from the President to delay or dismantle the health care reform law and impose steep cuts to Social Security and Medicare – have suggested that the government could avoid “default” by prioritizing interest payments to debt holders.

During Thursday’s hearing, Sen. Pat Toomey (R-Pennsylvania) pressed Lew to “assure” Congress and debt holders that “under no circumstances will [Lew] permit a missed payment on a U.S. Treasury security obligation”.

But Lew could not offer such assurance because, as he pointed out, “the options are all bad” and given the complicated nature of the federal payment system, which processes roughly 80 million checks a month.

Lew pointed out that the federal payment systems were “properly” designed to pay all the government’s bills, not just a select few.

“The systems are automated to pay because for 224 years, the policy of Congress and every President has been to pay our bills. You cannot go into these systems and easily make them pay some things and not other things. They weren’t designed that way because it was never the policy of this government to be in the position that we would to be in if we couldn’t pay all our bills,” said Lew.

Lew said he doesn’t believe that “there is a way to pick and choose” which payments to proceed and which to postpone.

“This system was not designed to be turned off selectively. So anyone who thinks it can be done just doesn’t know the architecture of our multiple payment systems that are very complex. They were designed properly to pay our bills; they were not designed to not pay our bills,” said Lew.

Lew told Toomey that the only way to ensure that even the debt interests are paid in full and on time is for “Congress to act and raise the debt limit.”

Read more: Conservative expert downplays need for debt limit increase, claims U.S. won’t “default” as long as debt interests are paid

“There is no good solution if Congress fails to raise the debt limit,” he emphasized. “I think prioritization is just default by another name. It’s just saying we’ll default on some subset of our obligations,”

The current annual tax revenue covers between 70% to 80% of the U.S. government’s bills, which again are authorized by Congress. The remaining 20% to 30% of the obligations are covered by allowing the Treasury to sell securities to investors, which requires Congress to raise the debt limit.

And just like monthly cash flows aren’t consistent for businesses, the tax revenue received by the Treasury fluctuate from month-to-month.

“Some months it’s 50%. So the amount that we fall behind in payments is just unthinkable,” said Lew. “I don’t know how you could possibly choose between Social Security and veterans’ benefits, between Medicare and food assistance. These are obligations we’ve made. You know, we wouldn’t have the money to necessarily pay our troops in full. We wouldn’t have the money to pay our veterans their benefits in full.”

He added, “If we don’t have enough cash to pay all our bills, we will be failing to meet our obligations, and under any scenario, we will be defaulting on obligations. There is no plan, other than raising the debt limit, that permits us to meet all of our obligations.”


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