It all began during the presidential primary campaign.
Vice President (at the time) Al Gore introduced the lockbox
argument as a response to the central theme of the George W. Bush campaign, a 10-year across-the-board cut in income
taxes of $1.6 trillion. The Gore argument had three interesting characteristics:
Mr. Gore, the taxpayers' champion.
Except for political junkies, Americans have little patience
with detailed soirees into the jungles of the federal budget. They react instead to sound bites and to personalities.
Appraising personalities is beyond the purview of this analysis. But sound bites are pertinent.
Mr. Bush's sound bite was "tax cut." That rang pleasantly in
the public ear. Mr. Gore's magic phrase was "Protect Social Security and Medicare," the same old chestnut that has drawn
votes to Democrats for decades. But in this instance Mr. Gore had a new wrinkle. He
would, as the people's representative, guard the SS and Medicare lockbox against attempts
by Mr. Bush to raid it with "risky" tax cuts.
Wow! What a guy. He would do that just for us. But did you
notice he never described exactly what he was protecting.
What is this lockbox anyway?
When federal revenue from payroll tax deductions exceeds SS
and Medicare payouts (and associated administrative costs), a surplus is generated. The accumulation of those annual
surpluses is popularly known as "the Social Security surplus," or -- as Mr. Gore would have
it -- the lockbox. According to the Congressional Budget Office (CBO) the lockbox will
accumulate $2.3 trillion over the next decade.
When federal revenue, excluding payroll taxes, from income
and other taxes and fees is greater than the cost of the federal budget (excluding SS and Medicare payouts) a surplus is
generated that, for the purposes of this analysis will be referred to as the normal surplus.
According to CBO, normal surpluses over the next decade will amount to $3.4 trillion.
The lockbox issue involves the $2.3 trillion only.
Where is the lockbox?
It is difficult to misplace $2.3 trillion. Where is it?
It is nowhere. It doesn't exist. It never has. Rifle at the
ready, helmet in place, bulletproof vest snug around the chest, Mr. Gore and his supporters are guarding a box filled with hot
air.
Funds from SS programs are used by the Treasury Department,
along with all other revenues, to pay expenses and entitlement obligations of the United States Government. In
return, IOUs (in effect) are created as evidence of interdepartmental debt.
So-called trust fund balances represent the promise (and nothing more) of the United States government to
pay defined amounts to certain citizens under certain circumstances. Congress establishes the
rules of the game and it can change the rules, as it has in the past, or eliminate the game
completely, whenever it decides to do so.
So what are the protectors of the lockbox protecting?
The purpose of the lockbox theory is to create in the minds
of voters the image of a huge pile of money surrounded by good Democrats determined to protect it from the tax-cutting
invasion of Republicans.
In the course of protecting the lockbox, Democrats take
double-counted credit: First they claim to be holding the money for a SS rainy day; second they claim they will use the same
money to reduce Public Debt. They do not tell you that when "trust funds" run dry, taxes or
borrowings will increase to cover the shortage -- but they will.
There is no money to protect. SS and Medicare trust funds
are a mirage. Reduction in national debt will be done, irrespective of the wishes of either political party, as a
normal consequence of Treasury Department procedures whenever it has excess cash. Protectors of
the lockbox are protecting nothing more than a public relations image they created in an
effort to maintain maximum income to the federal government.
Conclusion:
The lockbox doesn't exist; debt will be automatically
reduced if the projected federal surpluses appear; entitlement programs will be saved not by propaganda but by the first
group of courageous politicians willing to face up to the structural changes required to keep
the programs healthy for future generations.
Liberal Democrats and Republicans resist the Bush tax plan
because it threatens the most delectable revenue windfall that Washingtonocrats have ever experienced, a flow of cash that
they can spend on an ever-expanding federal government. Of course, as cover, they will
leave a few crumbs on the table for debt reduction.
Democrats, now led by Senate Leader Daschle, have established the premise that the
lockbox surplus (excess payroll taxes) is reserved for SS payouts or for debt
reduction. An upcoming essay will test the loyalty that Daschle's predecessors have shown to this concept
(protect the lockbox).
Ruled by a myth
THE LOCK BOX TRAP - Part 2
By Robert E. Kelly
The lockbox is empty. Taxes or debt will go up, or benefits
will go down when entitlement payments to beneficiaries exceed payroll tax revenues.
Putting aside the fundamental truth that the lockbox is a
myth to begin with, how loyal have liberals been to this current, ever-so-protective attitude toward the Social Security
(SS) surplus?
Previous presidents never heard of Al Gore's
lockbox.
For example:
Franklin D. Roosevelt invented Social Security. Certainly,
if anyone knew the meaning of a Social Security surplus (the lockbox), he did.
Social Security first appeared in the 1937 federal budget.
The lockbox surplus grew by $16.6 billion under Roosevelt and Harry Truman. It was used to finance the budget of the
nation. It was not protected. Both presidents -- the ones closest to the original intent of the
SS system -- ignored the lockbox theory.
During the eight-year Republican presidency of Dwight
Eisenhower, the SS surplus increased by $6.4 billion. Every dime was spent. Democrat Sam Rayburn, speaker of the U.S. House
of Representatives, didn't protest. Neither did Democrat Lyndon Johnson, the president of
the Senate.
The sacred lockbox was invaded with impunity.
Another eight-year period of Democratic rule commenced with
John F. Kennedy's assumption of office in 1961 and ended with Lyndon B. Johnson in 1968. Democrats
controlled the White House and both houses of Congress during those years when the
budget-breaking Great Society programs were introduced.
The SS surplus (aka the lockbox) increased by $6.9 billion.
It was spent. Debt increased, as it had under Roosevelt, Truman and Eisenhower. The lockbox theory was ignored.
The rotating White House door swung again in 1969 to the
Republican Party and lasted until Gerald Ford's defeat in 1976.
The cost of maintaining Lyndon Johnson's Great Society
programs far outpaced federal revenues during this era -- a time when entitlement reform should have been on the table.
(No chance of that, however, with Democrats in charge of the House and Senate). The
surplus was not protected. It was spent. Debt increased.
By the time Democrat Jimmy Carter assumed office, the
federal budget was beyond the control of the government. Only a booming economy could generate the revenue that
Washingtoncrats needed for their social-engineering toys. And the economy was
flat. It badly needed an energizer bunny, a leader who was entirely the opposite of Mr. Carter.
Did Mr. Carter honor the lockbox theory so dear to the
hearts of his modern colleagues? We'll never know. Why? Because he didn't have an SS surplus to work with -- instead, he
had a deficit of $4.4 billion. The overburdened system was broke. Payouts exceeded payroll
tax income. National debt increased to cover the shortfall.
What did the great protectors of the SS system, as represented in those days by Carter,
Speaker "Tip" O'Neil and the Mansfield/Byrd team in the Senate do to protect the
programs they had invented? Nothing!
They passed the problem along to the next president.
The economy faltered after the 1960s, assisted on its
downward road by the high interest rates associated with a long history of accelerating federal deficits. And the nation was
economically vulnerable to an extent not generally realized when Ronald Reagan, Republican,
assumed office (1981) - unemployment rampant; interest rates soaring; inflation
destroying the value of the dollar. Uncontrolled federal spending swelled the national debt. America
badly needed a healthy economy spewing funds into Washington.
When Mr. Reagan left office, the economy was booming.
Mr. Reagan also attacked Mr. Carter's SS deficits and, as a
result, the lockbox was enriched by $125.3 billion. Every dime of it was spent. No complaints were heard from
Democrats.
The payroll tax rate increase introduced under Mr. Reagan,
plus the boost in employment attached to the Reagan economy caused the SS surplus to grow under George H.W. Bush
by $281.8 billion, all of it used to offset the deficit for the period.
Congressional leaders did not complain when the lockbox
wasn't protected.
William Clinton reclaimed the White House for Democrats in
1993 and ruled for eight years. The SS surplus increased by an indecent $694.5 billion -- 35 percent of it ($244 billion) was
used to reduce debt; the rest was spent.
One might say this allocation of the surplus partially
honored the lockbox theory, but, given the spending history of Congress, it is more likely that the amount used for debt
reduction simply represents the power switch in Washington -- Republicans assumed control of the
Congress for six of Mr. Clinton's eight years.
Conclusion:
Extended periods of federal deficits should have made it
clear that SS surpluses are a hoax. Funds from all sources, including SS surpluses, are spent during red-ink eras.
Excess payroll taxes become an issue only when a federal
surplus appears. Then, all of a sudden, liberals declare that the SS portion of the surplus is special.
But it isn't. An SS surplus (excess payroll taxes) is no
more sacred than an income tax surplus. Excessive taxation creates both. And excessive taxes should be used for only two
purposes -- tax relief and debt reduction.
Liberals reluctantly accept the notion that some public debt
should be repaid. But then they demagogue the debt-reduction process by relating it to "saving Social Security." The two
concepts have nothing to do with each other.
Your pension check is not more secure because the federal
government has retired some debt.
Debt is too high and for that reason alone it should be
lowered; the SS program is financially unsound and for that reason alone it should be restructured. Hypocrisy is at play
when the two ideas are mixed.
The shell game is in operation during the surplus debate.
When the focus is on the $2.3 trillion SS surplus, the $3.4 trillion normal surplus is forgotten -- and Democrats want to
spend as much of it as they can.
Mr. Bush says they will if it's available to spend. The next
essay will examine that position.
Ruled by a myth
THE LOCK BOX TRAP - Part 3
By Robert E. Kelly
President Bush claims Congress will spend every dollar
within reach, and then some. Are his fears justified?
It was not always true. Prior to Franklin Roosevelt (FDR),
Washington borrowed during emergencies (war, recession, etc.) and paid down when normal times returned. FDR's
pay-down tendencies were never tested because he presided during an era that demanded
high spending and high debt.
Debt control under Harry Truman and Dwight Eisenhower
reflected the conservative attitudes of previous presidents.
If President Bush has a case (Congress is not to be trusted
with surplus funds), the evidence must be found in the period that began with John Kennedy (1961) and ended with William
Clinton (2000).
Public debt increased for 40 years until 1998.
Public debt increased in every presidency since Eisenhower,
until Mr. Clinton's second term, because of overspending. And explanations given by Congress for its inability to restrain
itself grew more inventive as time went by.
Kennedy/Johnson (1961-1964): Public debt increased every
year. Tensions with Cuba and modest involvement in Vietnam are sometimes offered as explanations. This is camouflage.
Revenue went up about 25 percent while Defense was essentially flat. Debt rose because the
rate of domestic spending was cut loose (for example, Human Resources spending, up 34
percent).
Lyndon Johnson (1965-1968): Debt increased 13 percent. The
cost of the Vietnam War is offered as the excuse. This is incorrect. The revenue increase was adequate to cover
increased Defense spending. The problem was elsewhere (for example, Human
Resources spending, up 68 percent).
Beyond that, Mr. Johnson and his supporters authorized the
Great Society programs -- budget breakers that would haunt every succeeding president.
Richard Nixon (1969-1972): Public debt increased 11 percent.
Again, the Vietnam War is offered as the explanation. That is incorrect. The rate of increase in Defense was well below
the increase in income. The problem lay elsewhere (Human Resources, up 81 percent).
And, for the first time since the war years, interest on the
debt was a major budget item -- a reminder that debt always has a nasty, unproductive companion.
Nixon/Ford (1973-1976): Public debt went up 48 percent. More
than any other modern president, Ford could blame external causes for the debt increase. Real growth in Gross
Domestic Product was about a third of what it was under Mr. Johnson. But
overspending hid behind the headlines of the day (Human Resources, up 90 percent).
Jimmy Carter (1977-1980): Public debt increased 48 percent.
The cost of energy is given as the major reason for the increase. Also, the rate of growth in GDP slumped to zero.
These were important factors in the debt increase. But it's also true that the cost of interest
associated with the runaway debt had moved into the uncontrollable area, and the rise in
the cost of social programs was out of hand (Human Resources, up 54 percent).
Ronald Reagan (1981-1988): Public debt zoomed again -- 83
percent in Mr. Reagan's first term; 58 percent in the second. Critics usually point to Mr. Reagan's military buildup or his
tax reductions for this. Again, the arrow points away from the real causes.
Economic growth was at a standstill in his first two years.
Interest costs had become ridiculous (twice the size of
Medicare in 1988).
Overspending continued.
At the end of the Reagan years, economic growth had been
restored and it would increasingly support the federal budget over the next dozen years.
George H.W. Bush (1989-1992): Public debt went up 46 percent. The cost of the savings
and loan bailout (about $140 billion) made an improving condition look worse than it was.
The rate of spending continued to outface the rate of revenue increase (Human Resources,
up 45 percent)
William Clinton (1993-2000): Public debt increased 24
percent in Mr. Clinton's first term; decreased 4 percent in his second. The revenue benefits of the Reagan boom finally
overcame federal spending in 1998 and produced surpluses and debt reduction. At the end
of the 20th century it could be said that the economy, although slumping, was healthy, but the
spending trends that had built public debt lurked in the shadows, unrepentant.
Conclusion:
Public debt goes up when government outspends its revenue.
With one exception (1969) that was the case for four decades. Congress in good times and in bad, in war or in peace,
spent whatever it took to support whatever it could think of.
No single thing has been more responsible for continuing
deficits and climbing debt than the cost of social programs that should have been recalibrated during the 1970s. The budget
category "Human Services" captures most of them. By no stretch of the imagination can the
historical rate of increase in those costs be referred to as normal when related to sensible,
humane tax policy.
The conclusion is inescapable: Social Security surpluses
were routinely spent throughout the period to pay for unreasonable cost increases. And, history says, they will be
spent again if the surpluses are available.
For the past 40 years, a period characterized by deficits
and debt, liberals dominated the power positions in Washington. During the years in which Great Society programs became
entrenched (1961-1976), they owned Washington. But Democrats lost control of the Senate
and the House in 1994. Magically, surpluses appeared.
In 2001 Democrats regained control of the Senate. History
says that liberals are the big spenders -- the creators of debt. Mr. Bush believes they still are. He has a case.
Ruled by a myth
THE LOCK BOX TRAP - Part 4
By Robert E. Kelly
Lock box. A strong term that evokes images of safety,
security, permanence.
And that's why Al Gore used it in connection with Social
Security (SS) and Medicare during the presidential campaign. He posed as the protector of the lock box, the defender of
entitlements, the people's guardian. And he got away with it, especially with vulnerable senior
voters.
By and large, voters still believe payroll deductions are
buried in a coffee can somewhere in Washington awaiting their retirement needs. In the real world, of course, the lock box is
full of the same hot air that liberal politicians have been spewing for well over a half-century.
President Bush didn't confront Mr. Gore's lock box theory
during the campaign. He had already assumed the risk of saying that entitlement systems had to be restructured. But his
political instincts warned him that if he went further in challenging the status quo it could cost
him the election. So he put on his "make believe" hat and, unfortunately, promised
that he too would protect the fictional lock box (SS and Medicare surpluses).
Accepting the lock box idea could trap Mr. Bush.
A ten-year surplus of $5.7 trillion has been the benchmark
figure used by both parties when discussing budget plans for the next decade -- $2.3 trillion represents the accumulated SS
surpluses (the lock box). If the lock box theory is accepted, this means the amount available
for increased spending and tax reduction is reduced to $3.4 trillion; if the theory isn't
accepted, the entire surplus of $5.7 trillion is available for tax relief, debt reduction, military
reform and SS/Medicare restructuring.
Because he couldn't challenge the lock box theory during the
campaign and survive politically, Mr. Bush must now negotiate the mousetraps attached to it.
-
If increased spending plus tax reduction in any single
year is greater than the normal surplus (excludes trust funds), liberals will clamor that Mr. Bush violated the lock box, broke
his word and will, if allowed, lead the nation back to the days of federal deficits and climbing
debt.
-
By definition, a reduction in payroll taxes is out of
bounds for so long as the lock box theory lives -- it straps this punishing and excessive tax onto the backs of workers, an
especially onerous burden to lower-paid employees and entrepreneurs.
The lock box theory will snap at Mr. Bush's heels for so
long as the public believes there is a pot full of money somewhere in Washington.
Although modified, the Bush plan has survived.
The original Bush tax plan was not offered as a short-term
response to the current economic slowdown, nor was it an attempt to reform the entire tax system. It was proposed as a
matter of equity and fairness.
Income taxes are at an all-time peacetime high and are, in
some instances, punitive and unfair. Mr. Bush's tax plan gives relief to those who currently pay income taxes, and it
eliminates some of the unfairness (death and marriage penalty taxes, for example).
Unfortunately, Mr. Bush allowed his plan to be examined in
the context of the current slowdown in the economy. Although this made the idea of a tax reduction more salable, it
was a mistake because it shifted focus away from the fact of over-taxation and unfairness
and it allowed opponents to find a "flaw" in his approach, and to offer solutions of their own.
But the error was not fatal. A long-term tax cut was passed ($1.4 trillion range), and its first
year impact will be popular.
Liberals, so far, have failed to derail the Bush tax program, but persistent attempts to
sabotage it are ongoing.
Dangers ahead.
The upgraded first-year tax rebate aspect of the Bush plan
would pose no problem absent the lock box theory. According to the Congressional Budget Office (CBO), Mr. Bush will
have a surplus of about $280 billion to work with in fiscal year 2001. But since he, in effect,
signed on to the lock box idea, available surplus drops to about half that amount. And the
actual surplus may be less than projected, perhaps significantly so. In that case, liberal
hounds will attack the Bush tax plan as being risky -- an idea that raids the lock
box.
How likely is it that the projected surplus will disappear
and leave Mr. Bush holding the bag? Consider the following:
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In general, Washington's financial projections are
notoriously unstable. In 1997, for example, OMB estimated federal receipts in 2001 would be $1.8 trillion; the most
current estimate is $2.1 trillion -- $300 billion difference. Such variations do not inspire confidence.
In combination, these factors could eat up the projected
surplus and place the President's signature issue, long-term tax relief, at risk.
Conclusion:
The lock box doesn't exist but many people -- perhaps
most -- think it does. As a matter of fact, liberals have been gleefully looting the SS surplus to pay for their favorite
programs -- $1.1 trillion of these ever-so-precious dollars have been routinely blown over the past four
decades. The SS surplus, it seems, is available to liberals for spending but is
not available to taxpayers for tax reduction. Such logic makes sense in Washington and no place else.
If liberals had practiced over the past four decades what
they currently preach, the national debt would be $1.1 trillion lower and the saving in interest expense in 2000 (about $45
billion) would have been large enough to cover the entire cost of the State Department
(including foreign aid) for almost three years.
Absent the lock box trap, Mr. Bush could have offered a tax
cut (including payroll taxes) twice as big, limited only by funds required for reasonable debt reduction. His first-year
stimulus package could have been larger. He wasn't more aggressive because he fears the
American voters. They will turn him out if he opens the lock box filled with nothing.
How sad it is to be ruled by a myth.
Sources of budget data: Historical Tables, OMB, 2002
Click
here for more information on Mr. Kelly's book