‘Lockbox’ Lightened by $33 Billion in 2001

The federal government had to pry open the Social Security “lockbox” to obtain funds to finance spending in the fiscal year that recently ended, the Bush administration said Monday.

In its final accounting for fiscal 2001, which concluded Sept. 30, the U.S. Treasury said it spent $33 billion in surplus Social Security funds to offset a deficit in its other accounts.

Because Social Security recorded a $161-billion surplus, there was plenty of money to go around, and the government still was able to pay off $90 billion in publicly held federal debt, administration officials said.

But officials were forced to abandon previous pledges to reserve all of the Social Security surplus for debt reduction. The turnabout is attributable in large part to the deepening economic downturn, last summer’s big tax rebates and the response to the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon.

Treasury Secretary Paul H. O’Neill and Budget Director Mitchell E. Daniels Jr., who released the year-end figures, did not mention the shortfall in the government’s non-Social Security accounts. They focused instead on the overall surplus of $127 billion.

“The government recorded the second-largest surplus in history and paid down $90 billion in debt,” Daniels said. “We must make sure that this is not the last surplus, by limiting additional spending to purposes directly related to the nation’s battle against terrorism.”

According to the year-end balance sheets, the government took in $1.483 trillion and spent $1.516 trillion outside of Social Security, producing a shortfall of $33 billion.

It took only a few months for the black ink to turn red. When the administration submitted its first budget documents to Congress in April, it projected a $122-billion surplus outside Social Security. In August, after the White House and Congress decided to distribute $38 billion in tax rebates to give the economy a boost, the White House said it expected a non-Social Security shortfall of $4 billion.

The deficit in the non-Social Security accounts ended a brief era in which the so-called lockbox remained safe. After years of deficit spending, Washington recorded a razor-thin $1-billion surplus outside Social Security in 1999, followed by an $87-billion overage in 2000.

Although President Bush and many members of Congress endorsed the lockbox concept, Bush said he would consider the commitment waived in the event of war or recession. In recent weeks, he has gotten some of both.

The economic slowdown that began last year has become more severe, and most economists agree that the nation is experiencing its first recession in a decade. The downturn has cut tax collections at the same time that it has increased spending for unemployment benefits and other safety-net programs.

In addition to the $38 billion in rebate checks sent to taxpayers last summer, the Sept. 11 terrorist attacks in New York City and near Washington tightened the fiscal squeeze. Congress quickly approved $40 billion in emergency funding, some of which was spent before the end of the 2001 fiscal year.

Many economists contend the lockbox concept is misleading. Using Social Security surpluses to finance current spending instead of debt reduction does not affect the future solvency of the retirement program. Even if the surplus disappears and the trust fund runs a deficit, benefits paid to the elderly aren’t jeopardized, they say.

But debt reduction generally is thought to have long-term benefits that could affect Social Security indirectly. By lowering future interest payments, it enables the government to borrow more money in the future to finance benefits or other spending. Debt reduction also restrains inflation and causes long-term interest rates to decline.

“The nation had a big opportunity, and that was to pay down debt and to save more in preparation for the serious costs that will be generated by retiring baby boomers,” said Henry J. Aaron, a Social Security expert at the Brookings Institution in Washington, a centrist think tank.

“I fear that next year we may be back into a situation of overall deficit. That would be a shame, not because it directly threatens Social Security in any way, but because it represents a lost opportunity to strengthen the U.S. economy.”

Only a few months ago, it appeared that the lockbox would become a big issue in next year’s congressional elections. Democrats were accusing the president and his GOP allies of squandering the surplus with tax cuts. Republicans were insisting that the lockbox would remain intact, and that Democrats were looking for an excuse to boost federal spending.

Sept. 11 changed all that.