Here’s why talk of a Social Security Trust Fund “Lockbox” is a hoax. I almost included this as a sidebar in Deficits for Dummies, but decided it should stand on its own.
When our Social Security system takes in more FICA tax dollars from today’s workers than it spends in SS benefits for today’s retirees, we have a choice between the following two alternatives for safeguarding the surplus in the SS Trust Fund:
1: Leave the dollars in the Trust Fund; lock them up and don’t let anybody touch them, because in the future they will be spent on SS beneficiaries.
2: Use those dollars to buy intragovernmental bonds; convert them back to dollars in the future, to be spent on SS beneficiaries.
But let’s define a key term: What is a dollar of our currency? It is a “small denomination, non-interest-bearing US-government-issued bearer bond of no fixed maturity.”
Therefore, the two Trust Fund choices above boil down to:
1: US-government-issued, zero-interest bearer bonds; or,
2: US-government-issued, interest-bearing intragovernmental bonds.
Not much difference, is there? Option 2 earns interest, but remember, “interest” will be paid in dollars (“US-government-issued, zero-interest bearer bonds”), which would then be converted back to intragovernmental bonds.
Which option do you like better? Is it a tossup, or is Option 2 better because it earns interest for the Trust Fund? In truth, both options are identical in their effects on total federal government finances.
Anyway, guess what: Option 2 is current policy. Option 1 is the Lockbox Hoax, advocated by those interested in securing your vote, not your share of the Trust Fund. [A snappy question for any Lockbox advocate: “Why don’t you want the SS Trust Fund to earn interest?” Watch ‘em squirm.]
