If the government doesn't have enough money to pay the interest its bonds it is legally in default with all sorts of bad consequences.
The answer is that the government has to exhaust its ability to create new money.
If the government doesn't have enough money in a specific budget category (current payroll taxes plus trust fund), it pays less money out to social security beneficiaries.
The US government can’t run out of or exhaust it’s ability to spend US dollars, and is ultimately not constrained by line item budgeting.
The government can always continue to make SS benefit payments and would not “spend tax collections” to do so. Taxing and bond issuance are simply devices to take money out of circulation. Our “leaders” and their media asswipes bullshit us into thinking that government spending is like your household spending—but unless you can print money it’s just not.
The only problem with having the government create money and give it away arises when there’s not enough goods and services to spend it on. That creates inflation.
If we’re able to increase productivity (more goods and services at current input levels) we’re good to go.
Do not misquote me - the entire point is that the government can only exhaust its ability to create new money if congress does not approve of a higher debt ceiling once the previous one has been reached.
The government defaulting would be a political move, and, curiously, the public does understand this on some visceral level given the backlash those shenanigans have faced in the past.
Here is the full quote:
The answer is that the government has to exhaust its ability to create new money and that is why the discussion of possible default never is about having depleted the account of taxes collected (because such an account doesn't exist because the money collected in taxes is destroyed upon collection; only applies to federal not state taxes because only the federal government can create new money) but always about the debt ceiling, which is the limit imposed by congress on the creation of new money.
The debt ceiling is simply another political contrivance and is certainly NOT what the ”ability” to pay SS is about. In the real world it’s about keeping inflation in check.
Once the debt ceiling is reached the ability of creating new money is effectively exhausted until the ceiling is raised again by Congress - messing with the debt ceiling is probably the crudest and least workable approach to manage the money supply, i.e. control of inflation etc.
And FWIW—When the federal government receives taxes from us the money is set as a credit in their account at the treasury. This money is effectively taken out of current circulation. When the federal government spends money it debits its account at the treasury and credits an account in a commercial bank. The adds money into circulation.
That is incorrect, when the federal government has figured out how much tax you owe (duh...), it is recorded the General Account of the Treasury as a debt you owe.
Once you have paid your taxes your liability goes to zero as does your record in the General Account. This is the step where the money is destroyed (= taken out of circulation).
All that's left is your tax receipt which is also recorded in the General Account and serves as the record of incoming funds which, together with outgoing fund receipts, allows for assessing overall balance - these are accounting tools no more and no less.
When the government has to fund outgoing payments, for example to fund its own operating accounts at commercial banks, it creates new money and that is recorded in the General Account as government debt.
If this sounds odd, consider how taking out a loan from a commercial bank works:
The bank approves the loan and turns around to sell government bonds back to the Treasury and the Treasury creates new money to buy these bonds which goes into the bank's account.
The new money appears in your account as does a credit note with the exact amount and a coupon attached, ready to be spent.
Once you pay back the loan the balance disappears from your account and your liability (credit note + interest) goes to zero.
The paid off loan appears as a positive position in the bank's account and the bank turns around and buys back the bonds from the treasury creating a government liability at that instant, as well as a record of payment received in the General account with the money effectively destroyed (taken out of circulation).
What you are describing is the false analogy between a sovereign government's control of the money supply and its methods of internal accounting, and private households/businesses who do not have the ability to create new money to match their liabilities - this is a fundamental difference that is not understood by many.
