October, 2001 · No.2001-10
Social Security Ranting over Illusory Lock Box
By Richard E. Wagner, Ph.D.
What is all this foolish talk about a social security lock box? It's foolish talk because those who talk the talk know there is no such thing. Indeed, there never can be any such thing as long as social security is a government program. It is important to understand that the talk is not really about lock boxes, sacred trust, and the like. It is about establishing strategic positions in a political contest of will over future tax rates.
Until 1984, social security was a program where the total amount of taxes that taxpayers paid was roughly equal to the total amount of benefits that recipients received. This program of balanced budgets for social security was sure to encounter great trouble when the post-war baby boomers began to hit retirement age in the decade starting in 2011.
Looking ahead from 1984, there were three options for dealing with the coming bulge of baby boom retirements, while maintaining the present system. One was to cut benefits sharply starting around 2011. A second was to increase taxes severely starting around 2011. A third, which was largely a variation of the second, was to start collecting those higher taxes well in advance of 2011. This option was adopted, with social security scheduled to run surpluses between 1984 and 2018. Last year, for instance, social security ran a surplus of $85 billion.
The Bush administration has now suggested that the government might have to borrow $9 billion from social security to pay for other government programs. In many quarters, this suggestion has been treated as a gross violation of some solemn pledge, and has evoked a variety of negative reactions.
The trouble with all this fulmination about lock boxes is that it just isn't true. There is no lock box. There never has been. Lock boxes are meaningful only so long as someone has a clear property right to the key. Lock boxes require private property, and politics is all about converting private property to political uses.
If you invest your money in a bank or mutual fund, that money is yours, and you are rightfully entitled to the resulting earnings according to the contract between you and your financial institution. Your money is in a lock box, in that the financial institution is bound by its contract with you.
When politicians adapt such a term as lock boxes to their purposes, we may be sure that they do not intend to bind themselves in some sort of genuine contractual relationship. A contract is a promise for which damages must be paid by whoever breaks the terms of the agreement. Politicians are not liable for their promises and so, as one might expect, they break them whenever they choose.
The most important thing to remember about social security is that it is a government handout, and the terms of that handout are decided through politics. Government, moreover, is continually revising the various rules and payment schedules, with the changes in 1984 being but one illustration. Every time social security changes its benefit schedule, changes its tax rates, changes its retirement age, or changes anything else, politicians are breaking past promises. Indeed, the whole concern about social security and its long-term viability is a result of politicians making grossly inconsistent promises to different people.
Even with the current massive build-up of surpluses, it is widely acknowledged that by 2030 the trust fund will be gone and payments will be hugely in excess of revenues. In other words the political promises that were made to beneficiaries are inconsistent with the commitments that were made to taxpayers. The two sides don't add up. There was massive lying to the public throughout our political system.
Or at least it would be lying if it were a private retirement fund, where the managers of the fund were bound in a fiduciary relationship to investors. With social security, however, there is no such fiduciary relationship. If a private retirement fund were unilaterally to change its contract with you, you could sue it for breach of contract. When politicians do the same with social security, it is just so much "public policy."
What is really at issue in all of this talk about lock boxes is simply how high federal tax rates will be in future years. For now, the Bush administration has secured a temporary, ten-year reduction in tax rates. A betting person would surely wager that tax rates will be higher after this term of Bush-relief expires. Those who complain strongly about violating lock boxes, mostly liberals but not exclusively so, want tax rates to increase substantially now before ten years lapse. They, however, do not want to operate under the constraints of property, contract, and promise that apply to you and me.
(Richard E. Wagner is Holbert Harris Professor of Economics at George Mason University, and a member of the Board of Scholars of the Virginia Institute for Public Policy, and education and research organization headquartered in Potomac Falls, Virginia. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.)