Social Security Trust Funds

Note the following:

From the point of view of the Social Security trust funds, the holdings of "special" government bonds are an investment that returned 5.5% to the trust funds in 2005. , pp 4-5 The trust funds cannot resell these "special" government bonds on the secondary bond market, although the interest rate is determined based on market interest rates. Instead, the "specials" can be sold back to the government at face value, which is an advantage when interest rates are rising.

To escape paying either principal or interest on the "special" bonds held by the trust funds, the government would have to default on these obligations. This cannot be done by executive order. The Congress would have to pass legislation to repudiate these particular government bonds. This action by Congress could involve some political risk.

An alternative to repudiating these bonds would be for Congress to simply cap Social Security spending at a level below that which would require the bonds to be redeemed. Again, this would be politically risky, but would not require a "default" on the bonds.

Notice that a "default" on the bonds would probably improve perceptions of U.S. credit worthiness. Reason being that the future SS liabilities are reduced thus U.S. ability to pay those who hold marketable securities is enhanced. I mean U.S. treasuries are perceived to have zero default risk basically. A default on non marketable securities wouldn't hurt that perception in the least.