The Abraham-Domenici Lock-Box Legislation
by Robert Greenstein
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In Senate floor action on April 20, Senators Spencer Abraham and Pete Domenici offered a Social Security "lock-box" proposal as a substitute for another budget process bill. The Abraham-Domenici proposal (the "Social Security Surplus Preservation and Debt Reduction Act"), which is a revised version of a lock-box proposal these Senators circulated in March, is now being debated on the Senate floor. A first vote related to this legislation is expected April 22.
Backers of the legislation promote it as preserving and protecting Social Security (and doing more for Social Security than the Administration's proposals), while promoting fiscal responsibility and debt reduction. Close examination indicates, however, that the lock-box proposal would likely have quite different — and deleterious — effects. The legislation could lead to little debt reduction actually occurring, would risk making recessions more frequent, and would increase the risk of a government default.
Treasury Secretary Robert Rubin identified these and other problems with the version of the proposal that its sponsors circulated in March, and the proposal's sponsors have since modified it in an attempt to address some of these criticisms. While the degree of risk the current legislation poses is not as high as the risk that last month's version would have posed, the modifications fall far short of solving the serious problems the legislation raises. The problems stem from the proposal's basic structure.
- The legislation could lead to little debt reduction taking place. It authorizes the use of Social Security surpluses for purposes other than paying down debt or providing Social Security benefits, such as the creation of private retirement accounts. If much of the Social Security surplus is used to fund private accounts while most of the non-Social Security surplus is used to finance large and growing tax cuts — as the Congressional budget resolution approved last week envisions — little debt reduction will occur.
- The legislation poses a danger for the economy; it would
risk making recessions more frequent and deeper. The legislation would
establish debt limits requiring the non-Social Security budget to be in balance through
April 30, 2010. The Treasury would be barred from borrowing funds if a deficit
materialized, unless three-fifths of the Senate and a majority of the House passed
legislation to raise the debt limit and thereby allow borrowing to occur.
Budget cuts or tax increases consequently could be required if the economy weakens. When the economy slows, expenditures for programs like unemployment insurance rise, while revenues fall or grow more slowly. As a result, a slowdown in the economy could cause the debt limits the legislation establishes to be breached. To avoid such a breach, budget cuts or tax increases would be needed. But cutting government expenditures or raising taxes when the economy is slowing is the opposite of what sound economic policy would prescribe; such actions would risk pushing a weak economy into recession.
To address this concern, the legislation's sponsors have added a provision that suspends the debt limits after two consecutive quarters in which real GDP growth is below one percent. While helpful, this provision falls substantially short of what is needed to prevent the proposal from having a damaging effect on the economy.
The economy could weaken considerably — and be heading toward a possible recession — before real GDP growth falls below one percent for two consecutive quarters. During such a period, a budget otherwise in close balance would threaten to become unbalanced, necessitating budget cuts or tax increases to prevent the debt limit from being breached. Such austerity measures, however, would steepen the economy's descent.
Furthermore, when economic growth fell below one percent, Congress would not know it for about half a year, and still larger budget cuts or tax increases could be required during that time. If real economic growth is below one percent in the first quarter of a calendar year (i.e., January through March) and remains below one percent in the second quarter, the first point at which Commerce Department data will show that there have been two consecutive quarters of below-one percent growth will be at the end of July. From January through the end of July, the debt limits would remain in place. The budget cuts or tax increases the legislation could require during that period could tip the faltering economy into recession.
Adding to these problems, Commerce Department data on GDP growth rates often are revised. Data released in late July might show a growth rate of between one and two percent, but then be revised downward a few months later to below one percent. In such a case, the "escape hatch" in the legislation for a weak economy would take even longer to become effective.
That it takes a long time to recognize economic downturns is borne out by the experience of the last recession. Economic data show the recession started in July 1990. It was not officially declared a recession until 10 months later, on April 25, 1991, after the recovery had already started.
- The legislation also would increase risks of a government
default. A breach of the debt limit could loom as a result of a slowing
economy, lower-than-expected revenue growth (which could occur as a result of a drop in
the stock market) or other factors such as higher-than-forecast health care costs (which
could occur, for example, if a major flu epidemic broke out among the elderly). If such an
event occurred and Congress and the President could not agree in time on budget cuts or
tax increases to avert a threatened debt limit breach — and a three-fifths majority
could not be amassed in the Senate to raise the debt limit — crisis would loom. The
Treasury would have to default on government obligations or hold up various government
payments, possibly including Social Security payments. (Note: The lock-box legislation
would require Treasury to "give priority" to paying Social Security benefits in
such circumstances. If the debt limit has been breached and the Treasury is forbidden to
borrow, however, the Treasury may not have sufficient cash to pay all Social Security
benefits on time.)
In the past, it has proved hard enough to secure a simple majority in Congress to raise the debt limit, even when no feasible alternative existed; securing a three-fifths majority in the Senate could prove excruciatingly difficult. The proposed lock-box legislation consequently would increase the risk of a government default, an event unprecedented in U.S. history. (In response to criticisms that the bill could precipitate debt limit crises, Senators Abraham and Domenici have moved the date at which the debt limit is reduced from the start of every other fiscal year to May 1 of every other year, after the Treasury has received April revenue collections. This may reduce the number of circumstances in which a crisis would develop. It would not, however, solve the basic problem that a slowing economy, lower-than-forecast revenue growth, or other unforeseen factors could trigger a debt limit crisis and create the risk of a government default.)
- Requiring a three-fifths majority in the Senate for an increase in the debt limit also would be unwise because it would confer on minority factions in the Senate an unprecedented degree of leverage over national economic and fiscal policy.
It may also be noted that although some proponents of this legislation describe it as preserving Social Security for future generations, that is not the case. Without the legislation, Social Security is projected to become insolvent in 2034. With the legislation, Social Security still will be projected to become insolvent in 2034. It also is not accurate to describe the legislation as doing more for Social Security than the Administration's proposals.
In short, this analysis finds the lock-box proposal to have significant deficiencies and to pose large risks, even with the modifications its sponsors have made. The proposal's shortcoming do not mean, however, that proposals to lock away Social Security surpluses are inherently unwise. Carefully crafted lock-box legislation, designed so it does not risk pushing a weak economy into recession or triggering a government default, could serve a useful purpose.
But this particular proposal remains deeply flawed. Using debt limits enforced by supermajority voting requirements and backed by threats of default is an unwise way to achieve the goal of preserving Social Security surpluses.
Since 1990, the nation has used other mechanisms to enforce fiscal discipline — rules requiring that the costs of tax cuts and entitlement increases be offset, and rules imposing caps on discretionary spending. These mechanisms have been highly effective. They have operated without threatening budget cuts or tax increases when the economy weakened and without creating risks of government defaults. Mechanisms can be fashioned to enforce fiscal discipline and prevent inappropriate use of Social Security surpluses, building on the successes of the past decade's budget enforcement mechanisms, without posing the grave risks that the lock-box legislation now before the Senate would carry.