Mitch Daniels: Lock Box is Silly Idea

July 21, 2001

An epidemic of truth telling seems to have broken out among Bush administration officials. A few weeks ago, it was Treasury Secretary Paul O'Neill telling us that the Social Security Trust Fund has no assets. Now, according to New York Times columnist Paul Krugman (who supports the lockbox), OMB director Mitch Daniels has revealed that proposals for Social Security lock boxes are a sham. According to Krugman, Daniels explained, "There is no box. There is no mattress. Paul O'Neill doesn't have a hole in the backyard where this money goes…what's unfair is to mislead the American people into thinking this money's in a box somewhere. It isn't. That box has nothing but promissory notes in it."

Daniels is entirely correct. Social Security is a pay-as-you-go system, meaning each year's benefits must be paid out of revenues collected in that year. Between now and 2015, the Social Security system is expected to run a surplus. The surplus revenues are used to purchase government bonds, which are credited to the Social Security Trust Fund. Those bonds are a promise against future tax revenues payable in whatever year they are redeemed. The Treasury having "sold" the bonds to the Trust Fund, receives in turn the revenue from that sale, which becomes general government revenue. Traditionally that extra revenue has been simply spent like all other government revenue. Under lock box proposals it could only be used to pay down the national debt. But it would still be spent for that purpose. It would be gone. It would not be "saved" for Social Security. The exact same bonds would remain in the Social Security Trust Fund no matter what the government spends the money on: paying down debt, tax cuts, or new spending programs.

As far as Social Security is concerned it doesn't change a thing. Come 2016, the program will begin running a deficit. In order to pay promised benefits, the government would have to find revenues with which to redeem the bonds in the Trust Fund. They won't find those funds in a lock box.

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