OUTSIDE THE BOX

SYNOPSIS: Prepare for Social Security to get plundered to pay for tax cuts During last year's campaign, George W. Bush solemnly pledged that his tax cuts would not come at the expense of future retirees, that the reserve the Social Security system was accumulating to help it pay benefits to the baby boomers would be kept in a "lockbox" — that is, that Social Security surpluses would not be used to cover deficits in the rest of the budget.

Ever since Mr. Bush was sworn in, however, it has been apparent that he takes some of his promises more seriously than others. And so no sooner were big tax cuts for the rich in the bag — an event followed, with breathtaking speed, by the revelation that revenue projections are in free fall — than administration officials suddenly discovered that the lockbox is a silly idea. Here's what Mitch Daniels, director of the Office of Management and Budget, said last weekend: "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." (Thanks to Joshua Micah Marshall for that quote.)

Clearly, Mr. Daniels knows that because of the tax cut Mr. Bush will soon break his promise to protect the Social Security surplus. (I could have told you that would happen eventually. In fact, I did. But the truth is coming out ahead of schedule.) And he probably also knows that, administration claims to the contrary, the budget shortfall is not just a temporary consequence of the slumping economy. So now he needs to play down the significance of that breach of promise.

The lockbox is, of course, not a literal box of cash. It is a rule, similar in spirit to the spending caps that conservatives love to impose, whose purpose is to protect politicians from temptation. The need for the lockbox arises from two crucial facts about the federal budget. First, that budget is dominated by the retirement programs, Social Security and Medicare — loosely speaking, the post-cold-war federal government is a big pension fund that also happens to have an army. Second, a decade from now the population served by those programs will explode, as the baby-boom generation reaches retirement age.

Because of those facts, merely balancing the federal budget would be a deeply irresponsible policy — because that would leave us unprepared for the demographic deluge, with no alternative once it arrives except to raise taxes and slash benefits. To ease the burden we should run large surpluses for the next decade — surpluses that will pay off the federal debt, and perhaps help purchase assets to back promised payments.

If politicians were saints, we could count on them to run the needed surpluses without imposing a rigid rule. But in the real world politicians need an artificial backbone. And hence the concept of the lockbox. The Social Security system is currently taking in more money than it pays out; the lockbox says that this part of the overall budget surplus is not available for tax cuts or spending increases.

Now economists who have examined the long-run U.S. fiscal situation uniformly find that even with this rule, tax increases or reductions in benefits will still be needed when the boomers retire. So maintaining the lockbox is not a high standard; indeed, a minimum standard would also put the surplus of the Medicare hospital insurance fund in the box.

The real problem with the lockbox is that it is too easily evaded — that politicians can use creative accounting to get around it. And that is exactly what the Bush administration has done: its tax plan is a Rube Goldberg device of delayed provisions, expiring provisions, hidden costs, etc., all designed to preserve the illusion that Mr. Bush is keeping his promise to protect Social Security. It is a testament to how deeply irresponsible the plan really is that despite all this effort Mr. Daniels now feels the need to tell us that the lockbox is meaningless.

So yes, it is crude and naοve to picture Mr. Bush stealing money from the piggy bank and giving it to his rich friends. Refined, sophisticated analysts know that what he has actually done is to undermine America's fiscal integrity in order to provide big tax breaks to his rich friends.

Originally published in The New York Times, 7.11.01