The Best Lockbox is a Personal Retirement Account

This week, the Senate will debate its version of the “lockbox” measure intended to put teeth behind Bill Clinton’s rhetorical promise to preserve every penny of the Social Security surplus for Social Security. Congressional leaders believe the lockbox issue will effectively counter Clinton’s demagoguery and clear the way for a tax cut bill this year. While it’s hard to argue with this political calculation, it’s still fair to point out that putting Social Security’s surplus into a lockbox will not improve the long-term health of the system.

However, if the goal is to keep politicians from plundering Social Security, the most secure lockbox Congress could create is a personal retirement account for each and every worker. So rather than play rhetorical games with the president, lawmakers should take an honest step toward reforming the system by rebating every dollar of the Social Security surplus into personal retirement accounts owned and managed by individuals, not politicians.

The Senate lockbox plan, designed by Spencer Abraham (R-MI) and Pete Domenici (R-NM), is essentially a plan to buy down government debt using Social Security’s $1.8 trillion in “off-budget” surpluses over the next ten years. (The House-passed version effectively achieves the same ends albeit through procedural means.)

The plan is supposed to protect the system by assuring that Social Security’s surpluses continue to build up in the trust fund while simultaneously reducing the government’s debt burden in preparation for the baby boomer’s retirement.

But this is simply a paper exercise. (Ironically, it’s similar to the Clinton plan without the double counting.) Allowing more IOUs to build up within the trust fund can make the system look healthier on paper, but it does not create any real assets that can be drawn down to cover the program’s long-term shortfalls. As most everyone knows, Social Security’s long-term cash shortfall – which begins in 2014 – totals $122 trillion through 2075 ($19 trillion after adjusting for inflation).

Likewise, buying down debt can make us feel better, but it does nothing to help us cover Social Security’s long-term liabilities. As the nearby chart shows, the 2014 insolvency date would not change even if Congress were to dedicate every dollar of Social Security’s surplus to debt reduction for the next fifteen years (a total of $2.7 trillion).

Without making any structural reforms to the system, we simply face the prospect of running up $8 trillion in new debt over the next twenty years to pay the system’s bills, unless of course we choose to raise taxes. This makes as much sense as putting an extra $1,000 a year toward your mortgage just so you can take out a second mortgage in fifteen years to finance your kid’s college education.

Moreover, even if we were to “bank” $2.7 trillion in Fort Knox until the baby boomers begin to retire, it would be trivial against the system’s long-term liabilities. In fact, $2.7 trillion would cover just 2.2 percent of the program’s long-term shortfall.

These figures aside, there are still many who argue that buying down debt will at least produce tremendous savings for the budget by eliminating costly interest payments. True. But even if we could capture these savings, they would be insufficient to cover the system’s long-term liabilities.

Let’s assume for a moment that we could eliminate the entire $3.6 trillion public debt today and, thus, save ourselves $230 billion in interest costs each and every year. While these interest savings would total $17 trillion through Social Security’s 75-year actuarial forecast, this is only enough to cover 14 percent of the program’s long-term liability.

The biggest flaw of the lockbox, and the biggest flaw of the Clinton plan, is that both plans do absolutely nothing to fix the system’s most serious problem — the poor rate of return future retirees will get out of the system. That’s why lawmakers must shift the terms of the debate away from talk of “safeguarding” the system’s surpluses, and instead talk about how to protect workers’ surplus payroll taxes.

The reason Social Security is running surpluses is that workers are paying higher payroll taxes than the system needs to cover current benefits. The $1.8 trillion in Social Security surpluses over the next ten years are the equivalent of $12,500 in excess FICA tax payments for every worker in America.

Lawmakers should argue that instead of using workers’ excess FICA tax payments to buy down debt, Washington has an obligation to allow them to invest those extra taxes in personal retirement accounts that will grow into real assets.

Reimbursing Social Security’s current surplus would finance a payroll tax cut of about 3.5 percentage points; this is a savings of $1,750 for a couple earning $50,000 per year. Multiply these savings by millions of families, and you can begin to see the power of compound interest.

If every worker was allowed to invest their share of Social Security’s surplus into personal retirement accounts, and these accounts earned just 8 percent annually, workers would own $6 trillion in assets by the time Social Security becomes insolvent, and $40 trillion in assets by the time the “trust fund” is expected to become exhausted. It sure beats buying down some low-interest debt.

In fact, the government is currently paying an average interest rate of 6.4 percent on the federal debt – closer to 4 percent after adjusting for inflation. That’s a pretty cheap debt to carry, and a very poor return on an “investment” of $1.8 trillion. Working Americans would be better off with growing assets in personal retirement accounts – even when the cost of public debt in included.

Lawmakers are right to try to beat Bill Clinton at his own rhetorical game by locking up the Social Security surplus. But the most secure “lockbox” they could create is a personal retirement account owned and controlled by each and every worker. They should rebate every dollar of the Social Security surplus into personal retirement accounts, then let Bill Clinton argue why the government is more qualified to “safeguard” taxpayers’ money.

1This article appeared in the Commentary section of The Washington Times on Monday, June 7, 1999.

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