THE REAL LOCKBOX

So now Alan Greenspan says the “lockbox” the Democrats pretend to advocate for Social Security must be “real.” Addressing the Senate Committee on Aging this Tuesday the 15th, he proclaimed:

In addressing Social Security’s imbalances, we need to ensure that measures taken now to finance future benefit commitments represent real additions to national saving. We need, in effect, to make the phantom `lock-boxes’ around the trust fund real.

It’s going to be very interesting to watch Democrats squirm – and a lot of squishy Republicans – when conservative Republicans on Capitol Hill take Greenspan’s demand seriously.

They are going to advocate something called The Real Lockbox. It puts the Dems in a lockbox without a key.

In 2004, Social Security payroll taxes brought in $151.5 billion more than the total of Social Security benefits paid out to recipients. This surplus was not set aside, invested, deposited, or in any way kept within the Social Security system. It was spent, spent by the federal government on general government expenses. Every dime. In its place are $151.5 billion of IOU’s issued by the Treasury Department. These T-bond IOU’s are not an asset, they are debt, a liability. A liability on which the government must pay compound interest.

As Greenspan noted, the 2004 federal deficit was officially $412.5 billion – and “would have been $564 billion,” if Social Security revenue hadn’t been included in the budget.

The “lockbox” proposed by Al Gore in 2000, that Democrats claim to want, that even Greenspan is demanding, would be owned and operated by the government. The Democrat lockbox is one where the government still keeps the surplus. The only difference is that the money is actually put aside somewhere, unspecified, and not folded into general tax revenue and spent.

What to watch for now is the Republican Real Lockbox, which would return the surplus to taxpayers. It will work like this.

Whatever percentage of the total Social Security receipts for a given year exceeds total payments, that percentage of payroll taxes paid by an individual taxpayer is returned to him or her in the form of a check. The check is marked: “For deposit into a Social Security Roth IRA account only.” Thus the return of the surplus to taxpayers is not a refund, it is a deposit.

If the Social Security surplus is, say, 25% of the total Social Security taxes paid in a given year, and an employee and his employer together paid $6,000 in Social Security taxes, the employee would receive a Social Security Roth IRA deposit check for $1,500 (25% of $6,000). The remaining $4,500 would be credited to the employee’s traditional Social Security account – the one to which the Supreme Court says the employee has no ownership rights – with the employee’s retirement benefit payments based on the total amount credited to the traditional account only.

The Real Lockbox thus reduces the liabilities accruing in traditional Social Security accounts by the surpluses plus interest. (That’s assuming that most everyone would accept their deposit check – people would be fully free to return the check and have it credited to their traditional Social Security account.)

These surpluses are currently estimated to be around one trillion dollars total until Social Security goes into the red in 2018. This is one trillion dollars on which the government (i.e., the taxpayers) must pay compound interest on wage indexing until recipients retire and cost of living indexing thereafter. Over several decades, several trillion dollars must be paid back on this initial one trillion – which means if that trillion goes into private Social Security Roth IRAs, those several compounded trillions are saved.

This reduces by those trillions future Social Security taxes paid by our children and grandchildren. Further, reducing these compounded liabilities would extend several years beyond 2018 the date when the surpluses vanish.

The reason why deposits must be placed into a Roth IRA is not only to make the savings secure – it is because Roth IRA dollars are after-tax dollars: no further taxes are due on Roth IRA dollars when they are taken out. A Social Security Roth IRA would place more restrictive investment and withdrawal rules than for an ordinary Roth IRA (such as limiting it to investments permitted by the Federal Thrift Plan plus the Wilshire 2000/5000 which are more diversified than the S&P 500).

Of course, the Democrats will scream that The Real Lockbox increases the deficit. The Republicans can respond: No more stealing from Social Security to fund general government expenditures. Spending must be cut. No more stealing.

The more difficult problem is that The Real Lockbox is far superior to President Bush’s own private accounts plan. The Bush plan assumes such a private account will earn an average of at least 3% plus inflation. This means that private accounts earning less than a real 3% will lose money, i.e., earn less than if payments were kept in traditional Social Security and not put into a private account at all. The 3% deduction proposal is essentially a 3% annually compounded tax on capital diverted to the proposed private account. How many investors would buy an index fund with a 3% per year management fee?

There are some very smart Congressional Republicans getting behind The Real Lockbox concept. Whether they end up in a tug-of-war with the Bushistas, or the latter admit to the flaws of their initial proposal, is going to be a major political drama this spring.

For sixty years, the Federales have stolen trillions of dollars from Social Security and spent it on non-Social Security expenditures, for the purpose of buying votes and expanding government. The Real Lockbox stops the stealing, creates Social Security solvency, and gives retirees a dependable and safe retirement fund of their own. I’ll keep you posted on it’s progress.