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April 20, 1999

S. 557 - Social Security "Lockbox" Amendment
(Abraham (R) MI and Domenici (R) NM )

The Administration strongly opposes the budget process legislation announced by Senators Abraham and Domenici and the Republican Leadership on March 10, which we understand will be offered on the Senate Floor as a substitute amendment to S. 557. While purporting to be a Social Security "lockbox," this legislation fails to protect Social Security and would in reality put payment of Social Security benefits at risk. For the reasons detailed below and in the attached tetter from Secretary of the Treasury Rubin, if the Abraham/Domenici amendment or similar legislation is passed by the Congress, the President's Senior Advisors will recommend to the President that he veto the bill.

The Abraham/Domenici amendment would establish declining statutory limits on debt held by the public. As explained by Secretary Rubin in the attached letter, these arbitrary limitations on the Treasury's ability to borrow funds could trigger periodic debt crises, placing at risk the Federal government's ability to honor its financial obligations -- including payment of Social Security benefits. The Secretary concludes that this mechanism would create "uncertainty about the Federal government's ability to honor its future obligations . . . potentially threatening the ability to make Social Security payments to millions of Americans." These concerns would exist even if the legislation is amended to include recession waivers, because any unanticipated slowdown in the economy would cause a breach of these arbitrary limitations on debt.

Furthermore, the Abraham/Domenici amendment would not extend the solvency of the Social Security Trust Funds by a single day. The legislation is flawed because it fails to extend the solvency of the Trust Funds, fails to ensure that the surplus is used to protect the payment of benefits to Social Security beneficiaries, and contains an escape clause designed to allow the diversion of surpluses attributable to Social Security to other purposes which neither help Social Security beneficiaries nor reduce the debt.

By contrast, the President has proposed a budget plan that substantially extends the life of the Social Security Trust Funds and dedicates a large portion of projected surpluses for the payment of Social Security benefits. The President's budget framework would reserve 62 percent of unified budget surpluses over the next 15 years to extend the solvency of the Social Security Trust Funds. These surpluses would be fully dedicated to the Social Security Trust Funds and would not be available for tax cuts or other spending programs. The independent Social Security Administration actuaries have estimated that reserving 62 percent of unified budget surpluses for Social Security would extend the life of the Trust Funds until 2059.

Moreover, the Administration supports extension of the Budget Enforcement Act pay-as-you-go requirements and discretionary spending caps, as additional insurance that the dedicated surplus funds will not be used for purposes other than Social Security solvency. The pay-as-you-go requirements and budget caps have been effective for the last ten years, and should be extended without change until the Congress and the President have secured the long-term solvency of Social Security.

In addition to securing the future of the Social Security program, the President's budget framework would lock away an additional 15 percent of total budget surpluses to extend the life of the Medicare Trust Fund by at least a decade. As with the Social Security surpluses, these funds would be dedicated to Medicare by investing the funds in Treasury securities and making them unavailable for any other purpose. The Republican proposal, by contrast, does nothing to guarantee extension of the Medicare Trust Fund and would seriously weaken the budget rules to permit non-Social Security surpluses to be spent on tax cuts.

The Administration may comment further, as the final details of the Republican proposal become available.

Attachment: March 17, 1999 letter from Secretary Rubin