THE 'TRUST FUND' AND 'LOCKBOX' FICTIONS

The 'Trust Fund' And 'Lockbox' Fictions
Bush must strip away illusions about Social Security.

Back to the Social Security Page

THINKING THINGS OVER

BY ROBERT L. BARTLEY
Monday, July 23, 2001 12:01 a.m.

History will judge George W. Bush by his success at stripping away encrusted illusions. He's already succeeded in paring taxes back from the wartime levels to which they'd thoughtlessly meandered, and seems determined to build the missile defense essential to U.S. status as a superpower in the new century.

Item one on the president's historical agenda, though, is only now being broached. Tomorrow the President's Commission on Strengthening Social Security holds its second meeting. The Depression-era Social Security system served the nation well, vastly reducing destitution among the elderly. But its foundations have been eroded by modern trends in life expectancy, living standards and retirement habits. Mr. Bush has a window of opportunity to salvage the system without an outright crisis, but it is rapidly closing.

The bipartisan commission, co-chaired by former Senator Daniel Patrick Moynihan and Richard D. Parsons, chief operating officer of AOL/Time Warner, expects to make recommendations in the fall. The task for tomorrow's meeting, and of a draft report released last week, is to outline the dimensions of the problem. The unfunded, pay-as-you-go, system worked just fine with 42 workers supporting each retiree, the case when payouts started in 1940. But by 1960 there were five workers per retiree, and now there are barely three. When the baby boom generation starts to retire, there will be two.

This brute fact carries unavoidable financial implications. Financing the system on an unfunded basis would require a 26% cut in Social Security benefits. Or a 37% increase in the payroll tax for a taxpayer making $50,000 a year. Or government budget cuts equivalent to eliminating the departments of Education, Interior and Commerce and the Environmental Protection Agency. Or borrowing enough to plunge the government into debt deeper than that required for World War II.

These projections are based on the Social Security Trustees' "intermediate" estimates of economic growth, which assume 2.4% annual growth in real GDP through 2010, falling to 1.6% by 2075. These are rather gloomy estimates; we should be able to beat them through growth-oriented economic policies and increased immigration. But as the draft report points out, faster growth is a two-edged sword. Yes, it increases the system's revenues. But since initial benefits are indexed to wages, growth also increases obligations. If the Depression-era formulas remain unchanged, growth cannot solve the problem.

The big obstacles to understanding the looming problem are the twin diversions of the "trust fund" and the "lockbox." While the system will start running deficits as early as 2016, the accounting fiction is that until 2038 it will merely be drawing on its "trust fund." But in fact, redeeming the government bonds in the fund will require the same tax increases, budget cuts and so on outlined above.

The "lockbox" is a rhetorical device designed to advance the notion that the government can put money on the shelf today and use it to pay Social Security after 2016. But again, the "trust fund" is merely paper the government has issued to itself. Under the "lockbox" program, Social Security surpluses are simply used to pay down government debt.

The most that can be said is that this will presumably make it easier for the government to borrow the money back to pay benefits in out years. The effect of this is depicted in the accompanying chart. As a proportion of GDP, the current national debt is trivial compared with the borrowing that would be necessary to fund the deficits impending under Depression-era formulas.

The "trust fund" and "lockbox" conceptions underlay the response of the commission's critics, which has basically been to accuse it of telling lies. "A fundamentally flawed and biased view," said William D. Novelli, executive director of AARP. "This report is issued only for one purpose and that is to frighten the American public," said Rep. Robert Matsui, Democratic Party spokesman on Social Security. "Sheer, mean-spirited nonsense" and "Orwellian doublespeak," says New York Times economic columnist Paul Krugman.

To back this petulant rhetoric, Mr. Krugman asks why government bonds are good assets in a private pension fund but not in the Social Security trust fund? Elementary, because bonds issued to intra-government accounts are not claims on additional resources. The draft report notes that when money is needed after 2016, "with or without a Trust Fund, the steps required to obtain that money remain the same: raise taxes, cut benefits or other government spending, or add to the national debt."

"When an individual buys a government bond, he or she has established a financial claim against the government. When the government issues a security to one of its own accounts, it hasn't purchased anything or established a claim against some other person or entity," David Stuart Koitz explained in a Congressional Research Service report. "The key point is that the Trust Funds do not hold financial resources to pay benefits--rather, they provide authority for the Treasury Department to use whatever money it has on hand to pay them."

The heavy rhetoric over the meaningless trust fund, in short, is explained by the ancient dictum "Point weak, yell loud." As for the "lockbox," the current surplus is what creates the window of opportunity for fundamental reform. But it has to be used more creatively than merely paying down debt and borrowing it back. For example, giving recipients the opportunity to invest in part of their current payroll tax in private accounts in return for reduction in their future claims on the unfunded system.

Details matter, and the commission will work on them between now and the fall. But conceptually, a partial privatization could restore the system to financial balance, promote savings and economic growth, and allow lower-income recipients an opportunity to accumulate a bit of wealth and property.
Mr. Bartley is editor of The Wall Street Journal. His column appears Mondays in the Journal and on OpinionJournal.com.