Help! How can I stop student loan marketers?

Will you explain the (Social Security) "lockbox" and "interest that the government pays itself for Treasury debt that it keeps 'off-budget.’?
-- Liz M., Hereford, Ariz.

I’ll try, but my guess is it will make your head hurt.

In order to pay for a very large anticipated bill for future claims on Social Security and Medicare, the government is taking more from future retirees than it’s paying out to current retirees. Which only makes sense: If you’re going to owe a big pile of money to the bulge of baby boomers when they retire, you had better save up for the day when they collect. It’s not much different than your own individual retirement account.

The problem is, if you’re the government, where do you put all this extra money? If you put it in the general fund, it goes to pay for new jet fighters and bridges and farm subsidies and expenses that have nothing to do with future retirement and health care costs. When the time comes, you have no money for those expenses.

You could put the extra money in CDs or other money market instruments. You could invest it in the stock market (which is what the White House would like to see by “privatizing” Social Security.) But if the stock market hits another dot-com bust, you could have a lot of people with little to pay for retirement.

So the government does what many people do with their own retirement funds: They buy good, solid, interest-bearing U.S. Treasury bonds. Just like a private citizen, the government knows the money will be safe. And these bonds pay a decent, predictable return on the money.

So now you have one part of the government (the Social Security and Medicare systems) buying hundreds of billions of dollars worth of debt from another part of the government (the U.S. Treasury.) This sets up some interesting accounting issues.

Technically, the government is borrowing from itself. So while the resulting Treasury securities generate interest payments for the Social Security System, they cannot be sold like ordinary Treasury bonds. For this reason, they are considered “off-budget” — the interest paid does not show up in the list of annual government operating expenses like the ones we spelled out in last week’s column.

All the “extra” money pouring in from Social Security and Medicare taxes is still going to buy Treasury debt. But some of the money raised from selling Treasury debt is being used to pay for “on budget” spending that can’t be covered with taxes (the federal budget deficit). That has some people worried that Social Security and Medicare funds are going into a black hole – and that these accounts will be broke when the boomers begin collecting. In the 2000 campaign, Democratic candidate Al Gore talked about these fears and suggested we needed a “lock box” to prevent this from happening.

But even if you took all this Social Security and Medicare money and put it in a lock box, you’d still have to invest it somewhere. You could buy Eurobonds, and the folks in Europe would love it: Their interest rates would go down as all this money started flooding in.

The real problem is three-fold, and the strongest lockbox in the world won’t solve it. First, the government needs to pay its bills with taxes, not more paper debt. Second, the Social Security System needs some adjustments — just as it did under the Reagan administration. And last, but certainly not least, Medicare (and the entire system of paying for health care) needs a major overhaul. It's in serious trouble — not because of accounting shenanigans but because health care costs are out of control.

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