April 21, 1999

The Abraham-Domenici Lock-Box Legislation
by Robert Greenstein

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The Abraham-Domenici Lock-Box Legislation

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.

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.