Keys to the Social Security Lockbox
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RAY SUAREZ: The long-term health of Social Security was in the hot August air today in Washington. A commission appointed by President Bush considered plans to reform the system, and the White House released new budget numbers showing that almost all of the remaining surplus comes from the Social Security Trust Fund. Already, the political debate over those figures is under way. For help in understanding the terms of debate, here is our economics correspondent, Paul Solman of WGBH in Boston.
JOHN DENVER, Singing: Almost heaven West Virginia…
PAUL SOLMAN: Like millions of Americans this August, we hit the road. But being in the economics reporting business, we weren’t just shooting for a day at the beach in this, the summer of our economic discontent. We wanted to know what folks were worried about, and one thing was Social Security.
MAN IN CAR: There is a major concern where a lot of people who are working and paying into Social Security. Will it be there when it comes time for them to retire?
PAUL SOLMAN: The latest headlines set the scene: The shrinking budget surplus, the recent tax cut, the debate over private retirement accounts. Do they threaten Social Security? But we were driving at some even more basic questions– how does Social Security work, and when folks talk about the Social Security Trust Fund and raiding the lockbox, what do they mean? We’re heading for Appalachia because the most visual answers to those questions lie in Parkersburg, West Virginia, but first you have to slow down through Clarksburg, where we went looking for some people to hear their thoughts on Social Security. It turns out it’s a major player in a local economy.
WOMAN: Well, I’m on Social Security, and that’s it.
WOMAN: That is my only income.
WOMAN: My mother’s the same way; she is on a fixed income from Social Security.
PAUL SOLMAN: Members of the Clarksburg chapter of TOPS– Take Off Pounds Sensibly– meeting in a local church may depend on Social Security, but they are not afraid to say they don’t exactly understand it.
PAUL SOLMAN: So when they talk about a lockbox or the Social Security Trust Fund, I ask you what it is? Do you know?
WOMAN: I’ve heard them talk about it before.
WOMAN: I’m not sure what it is.
WOMAN: Where it’s at or what it is.
PAUL SOLMAN: But it was time to make the last leg of the trip to Parkersburg, West Virginia, itself. Meeting us was Andy Jacobs, chairman of the House Ways and Means Social Security subcommittee. He worked on the Social Security Trust Fund in the early ’80s.
ANDY JACOBS, Former Representative (D-IN): In 1983, we did the Social Security bailout. We said everybody is going to have to give a little; workers are going to pay a little more, recipients are going to have to get a little less, and we said, “while we’re at it, let’s even tax a little bit more than that and build up a surplus to meet the baby boomers when they retire.” That is what that was all about.
PAUL SOLMAN: To put it graphically, those little bits of taxes have been accumulating year after year in the Social Security Trust Fund. The balance keeps changing as benefits flow out and tax money flows in, but one out of every four of these tax dollars is surplus and remains locked away to build the trust fund, which is by law, invested in low-risk U.S. Treasury bonds — Uncle Sam’s IOU’s — in this case to the Social Security Administration. The Federal Bureau of Public Debt is responsible for it all.
JERRY CHAPMAN: (shaking Paul Solman’s hand) Welcome to the Division of Special Investments.
JERRY CHAPMAN: (shaking Andy Jacobs’ hand) Jerry Chapman.
PAUL SOLMAN: Paul Solomon and Andy Jacobs. Yeah. Where is the lock box?
JERRY CHAPMAN: Right this way, please.
PAUL SOLMAN: Of course, all Social Security deposits and withdrawals are registered on computers. But to constituents, there was something tangible in the fund Congress led by Andy Jacobs passed a law to create physical versions of the bonds. This was the first time Jacobs would see his visual aids in person.
JERRY CHAPMAN: This is our lockbox.
PAUL SOLMAN: (Laughs) This is it?
JERRY CHAPMAN: This is it.
PAUL SOLMAN: This is the whole Social Security Trust Fund?
JERRY CHAPMAN: This is it. This houses the certificates.
PAUL SOLMAN: It’s really is locked.
JERRY CHAPMAN: The lockbox is locked.
PAUL SOLMAN: Can you open it for us? Can we see?
JERRY CHAPMAN: Yes, sir.
PAUL SOLMAN: Is it bad that we are shooting this?
JERRY CHAPMAN: (putting hand over combination lock) Maybe I should cover this.
PAUL SOLMAN: Yeah, that would be fine.
PAUL SOLMAN: I feel like I’m going to get my sneakers out of the locker here.
JERRY CHAPMAN: You ready?
PAUL SOLMAN: Yeah.
JERRY CHAPMAN: This is it.
PAUL SOLMAN: Remember — this is a visualization of the Social Security Trust Fund — the whole kit and caboodle amassed over the years is filed by interest rate -
PAUL SOLMAN: So each of those folders have a different interest rate… Here it is: Old age bonds. These and 9.25 percent.
JERRY CHAPMAN: That is correct.
PAUL SOLMAN: This was issued in 1988. And that is $2 billion. So we have an — oh, my goodness here is one that is due in 2003. That is almost $6 billion here at 9.25 percent. That is the highest rate of interest, but the fattest folder is for bonds paying 6.5 percent. Now we’ve got –
PAUL SOLMAN: — $11 billion. This is a bond for $11 billion issued in ’95 and comes due in 2015. 6.5 percent.
JERRY CHAPMAN: That’s correct.
PAUL SOLMAN: And another $11 billion.
JERRY CHAPMAN: That’s correct.
PAUL SOLMAN: And another $11 billion. So this is like $100 billion in this folder.
JERRY CHAPMAN: That’s correct.
PAUL SOLMAN: In all, there is more than a trillion dollars worth of Uncle Sam’s bonds – his official IOU’s to Social Security — already recorded in this very cabinet. While they are here as symbols of real transactions, actually holding them can be pretty reassuring even though they do look a bit drab.
ANDY JACOBS: I thought there may be a little more color on the instrument, but this is legal, it’s acceptable.
PAUL SOLMAN: Now as Social Security taxes continue to outpace benefits, the amount here is slated to grow to between $5 and $6 trillion. But sometime between 2016 and 2024– a matter of debate-benefit payments will start exceeding tax revenues, at which point the money for benefits has to come from somewhere besides current taxes. So what do they do?
ANDY JACOBS: Just go to the Bureau of the Public Debt, and the United States treasury issues… Redeems the bonds, you might say; pays the monies to Social Security; Social Security makes a direct deposit to your account.
PAUL SOLMAN: We were finally getting to a question that has long been bothering me. But where does the money actually come from to pay me?
ANDY JACOBS: A government buys a bond report with taxes. How does it take its bonds to Social Security? With taxes. There is no difference whatsoever.
PAUL SOLMAN: But what if there isn’t enough tax money to cover the Social Security obligations?
ANDY JACOBS: Well, that goes back to the 1980s. Every year they didn’t have enough taxes to pay. They wept out to borrow more money. Pray that doesn’t happen although it happened this very last quarter for the first time since ’93 I believe.
PAUL SOLMAN: Then the national debt goes up.
ANDY JACOBS: You guessed it.
PAUL SOLMAN: So the government has only two ways to raise money– taxes and borrowing, which brings us to the key to this story: The metaphorical lockbox about which we heard so many last year.
AL GORE: I’ll keep Social Security in a lockbox.
AL GORE: In a lockbox.
PAUL SOLMAN: The term lockbox actually invented by Republicans became the mantra of the Gore campaign and a standing national box.
SATURDAY NIGHT LIVE ACTOR: One of the keys to the lock box would be kept by the President. The other key would be sealed in a small container and placed under the bumper of the Senate Majority Leader’s car. (Laughter)
PAUL SOLMAN: But Candidate Bush also took the lockbox pledge.
GEORGE W. BUSH: Because we are lock-boxing the payroll taxes, our promises to seniors is going to be kept.
PAUL SOLMAN: Congress soon adopted the concept. And what was the lockbox idea? Actually saving this year’s and every future’s Social Security surplus — instead of as former Congressional Budget Office Chief Robert Reischauer told us spending the surplus by using it as part of the budget.
ROBERT REISCHAUER: In other words, using it to offset a deficit in the non-Social Security activity of the government where the income tax revenue and the gas tax revenue and the other taxes that we impose aren’t sufficient to pay for the defense and the Justice Department and the agricultural activities and the other things that the government does.
PAUL SOLMAN: So the lockbox promise was to use the Social Security surplus only to reduce some of our huge national debt– that $5 trillion hole we’ve dug for ourselves. Why? Because if the debt gets steadily eliminated with the Social Security surplus, when the surpluses end, Uncle Sam would be in a lot better shape economically. Less need to tax the heck out of future workers or to lower benefits in order to close the financing gap. Uncle Sam could then issue more bonds. “It’s the same as with you or me,” says Andy Jacobs. If you are debt-free, it’s easy to borrow.
ANDY JACOBS: But if you have a debt over here at the grocery, and then a debt over there, and you pay none of them off, obviously you are cruising for a bruising, as they say.
PAUL SOLMAN: At the national level, says Reischauer:
ROBERT REISCHAUER: If we could get the total debt down to a manageable level or even eliminate it entirely to pay for the baby boomers retirement.
PAUL SOLMAN: That was the key point in trying to reduce the total debt?
ROBERT REISCHAUER: Yes.
PAUL SOLMAN: If we don’t pay down the debt, we are raiding the lockbox.
ROBERT REISCHAUER: Raiding the lockbox would be defined as using the Social Security surplus for purposes other than to pay down the debt held by the public.
PAUL SOLMAN: And that is the issue: In the past year, the economy has slowed, corporate profits have plunged, the government is collecting less in taxes. Meanwhile, there has been a huge tax cut — add new spending, and the surplus is shrinking; down near the $156 billion mark in this year’s Social Security lockbox. Lower than that means raiding Social Security. No wonder, then, that Americans are again nervous about what happens when the baby boom retires. Will Uncle Sam find himself strapped and start reneging on his Social Security promises?
MAN ON STREET: There ain’t going to be no retirement around when we get old enough to get our retirement.
PAUL SOLMAN: If it’s U.S. Government IOU’s, it says we’ll pay these off.
MAN ON STREET: You got to trust the government first.
PAUL SOLMAN: Say what?
MAN ON STREET: You got to trust the government first. I don’t trust the government.
MAN ON STREET: What is this? The highest generation of older people– that is what I’m worried about, if there is going to be enough for this generation coming up.
PAUL SOLMAN: Because there won’t be enough workers to support you guys when you retire.
MAN ON STREET: Yeah.
PAUL SOLMAN: On the other hand, the history of West Virginia’s private sector is on view around the corner, at the Parkersburg Oil and Gas Museum. It is a history of failed banks and companies breaking faith with the west Virginians who relied on them — the very sorts of false promise that has helped to prompt a government safety net in the first place. Moreover, this state is a big beneficiary of public spending. But tell that to the people of Parkersburg.
GIRL: We might not have enough money left over when I get old enough to retire to pay for my Social Security. I might not see any of my money every again.
ANDY JACOBS: Do you think America will be here when you are of retirement age? Do you think there will still be a United States of America?
GIRL: I figure there will be, but it’s going to be chaotic, I figure.
JOHN DENVER: Country road…
PAUL SOLMAN: As we left Parkersburg, then there were questions on the horizon. Will tomorrow’s workforce be stuck with a huge tab? Might benefits be cut instead? Will the lockbox be raided, raising the specter of a looming national debt in the future?
JOHN DENVER: Country road…
PAUL SOLMAN: It all depends on the political landscape and future decisions that congress will start making when it returns from summer vacation.