Return of the Lockbox
Knight-Ridder/Tribune Media Services, Aug. 22, 2001
Just when you thought the debate over national budget and economic policy couldn't get any more confusing or silly, the "lockbox" is back. Big time. The Democratic National Committee is running TV ads asserting that "the Bush budget raids the Medicare trust fund—now he's using gimmicks to hide a raid on Social Security."
The Bush Administration insists that it is doing no such thing, and that they would never dip into the Social Security surplus to finance other spending. What's going on? Is anyone telling the truth here?
Unfortunately, no. Small wonder that few people bother to follow these debates, and even fewer understand them. But Federal spending decisions affect almost all of us, and the budget surplus is rapidly shrinking as the economy sputters. So it is worth a few minutes to sort through the trash and find out what is happening here.
Let's start with the "lockbox," a fictional concept popularized by Al Gore during his presidential bid, as well as by the Saturday Night Live comics who made fun of him. Social Security and Medicare (Hospitalization Insurance, or Part A) are financed through a payroll tax that takes in more than it is currently spending. It is these surplus funds—about $160 billion from Social Security and $30 billion from Medicare—that Mr. Gore wanted to put in a "lockbox," and that the Bush Administration is now being accused of "raiding."
But there is no such thing as "raiding" these funds, just as there is no such thing as a "lockbox." The surplus funds from Social Security and Medicare are invested in U.S. Treasury securities, which means that they are loaned to the federal government. The federal government cannot save this money—it is not allowed to invest in private assets. So it has to spend the surplus funds from Social Security and Medicare, whether we like it or not.
So the only question is: should these surplus funds be spent to pay off the national debt? Or should they be used for other spending—for example, to fund a prescription drug benefit for Medicare? That depends on your priorities. But the finances of Social Security or Medicare are not affected at all by whether these surpluses are used to pay off debt or for other spending. Either way, the trust funds will be repaid for the money they loan to the government, with interest—just like any other bondholder.
The notion that these funds were being "raided" was a verbal and accounting trick invented decades ago, by people who wanted to convince the public that Social Security's trust fund—which now holds more than $1 trillion—had been "spent." So it is ironic to see the Democratic leadership now using this trick for its own political purposes.
Of course the Bush administration has come up with its own little accounting trick—moving $4 billion from Social Security's income to the general revenues. This small-scale manipulation was done in order to keep up the pretense that the government was not "dipping into" the Social Security surplus.
But the big problem is not the trickery on both sides—confusing and dishonest as it may be. Rather it is the real consequences of both parties committing the Federal government to using all of the surplus that comes from Social Security to pay off the national debt.
Last year we had a record Federal budget surplus of $236.9 billion. The Administration's latest numbers show a surplus of $158 for this fiscal year. This is still a large surplus, but because it all comes from Social Security revenues, both parties are insisting that it must be used for debt reduction.
As the economy continues to slow, the surplus will shrink further. The dwindling surplus is actually a good thing, since a smaller surplus will stimulate the economy—this is what economists call an "automatic stabilizer." Will the Democrats support cutting federal spending on education or nutrition, just to make sure that all of the Social Security surplus is used to pay off debt?
The idea of using trillions of dollars of budget surpluses to pay off debt over the next decade has never made much economic sense. Our national debt relative to the economy is now at its lowest level since 1982. But to cut spending in a recession when the government is running huge surpluses, just to pay off debt, would be absurd and dangerous.