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Why a Balanced Budget Amendment Would Harm Social Security and Federal Deposit Insurance

April 9, 2018 at 10:15 AM

The problems with a constitutional balanced budget amendment, which the House will vote on this week, go far beyond the significant economic harm it could cause. For instance, its requirement that policymakers offset federal spending in any year with revenues collected in that same year would prevent Social Security and the Federal Deposit Insurance Corporation (FDIC) from using their reserves for their intended purposes of paying benefits and responding to bank failures, respectively.

Social Security. By design, the Social Security trust fund has built up reserves — in the form of Treasury securities backed by the full faith and credit of the United States — which it will use to help pay benefits for retired “baby boomers” in the late 2020s and early 2030s. Social Security now holds $2.9 trillion in Treasury securities.

But under the balanced budget amendment, it would essentially be unconstitutional for Social Security to use these savings to pay promised benefits. Instead, it could have to cut benefits, because all federal spending would have to be covered by tax revenues collected during that same year. More precisely, Social Security could use its accumulated Treasury securities to help pay benefits only if the rest of the federal budget ran an offsetting surplus (or if the House and Senate each mustered the three-fifths vote to override the balanced budget requirement).

Bank deposit insurance. The FDIC holds more than $90 billion of reserves, in the form of Treasury securities, to insure depositors’ savings. It calls upon these reserves when banks fail, jeopardizing those savings.

The balanced budget amendment, however, could make it unconstitutional for the FDIC to use its assets to pay deposit insurance, since doing so would generally constitute “deficit spending.” As with Social Security, the FDIC could make these payments only if the rest of the budget ran an offsetting surplus that year or if Congress overrode the balanced budget requirement.

If deposit insurance were no longer effective, panicked depositors could make runs on banks, causing a chain reaction that could turn a recession into a depression. That’s what happened from 1929 to 1933. Indeed, federal deposit insurance was enacted in 1933 — after a series of banking panics — to halt that collapse.

In sum, even though Social Security and deposit insurance have built up substantial reserves to pay benefits and claims, those reserves could fail to provide protection under a constitutional balanced budget requirement because the reserves wouldn’t count as revenues in the current fiscal year, while payments from the reserves would count as spending in the current fiscal year.