The reason the above maneuver is necessary is that Social Security FICA payments are "dedicated" to the Social Security program, or "off budget". They cannot just be used for normal operating expenses without some sort of subterfuge.

If the surplus was instead converted to normal treasury bonds the trust fund could actually invest them in a number of investment funds similar to the Thrift Savings Plan investment pools. That way the trust fund would be accumulating "hard assets" and conservatives could not make the specious complaint that the trust fund bonds are not real assets.

The trust fund bonds are guaranteed by the full faith and credit of the U.S. government, just like the bonds sold every week in the treasury auction to cover the budget deficit. The lock box is essentially an accounting mechanism that clarifies a lot of budget issues and in a macro-economic sense does make the transition in 2042 easier. Deficit spending, corporate welfare and unaffordable tax cuts would be more difficult to justify because the true costs would not be as easy to rationalize away.

Josh Marshall's point that we don't have a Social Security problem, we have a budget deficit problem is entirely accurate. It is easier to confuse the two issues because the Social Security surplus is used for operating expenses instead of placed in an accounting lock box that segregates it from the general fund, in addition to dedicating it to Social Security.

That's why the Bushies busted the Medicare and Social Security lock box that existed in 2001. The Democrats probably didn't complain because they had delusions that they would get to spend the surplus on government programs after the 2004 election. A lockbox accounting mechanism would result in a far more honest budget. We know how the Bushies feel about an honest budget:

Oh wait, 19% of Americans think they are in the top 1% of income earners.

That's why I support keeping the Diamond-Orszag Alternative in the Dems back pocket until Bush comes forward with a plan. When Bush unveils his plan, then the Dems can offer the Diamond-Orszag Alternative if they need a concrete proposal to contrast with the Bush stealth plan.

The safest course is to obstruct any reform until Dems take control of one house of Congress or the Presidency. I'm not completely sure, because legislative rules are not my specialty, but I think a lockbox could be introduced as a separate bill without opening the door to any additional changes. It would deal strictly and solely with how the Social Security surplus is accounted for.

There may technically be nothing to prevent the Republicans from taking a lockbox bill into a House/Senate negotiation and coming up with an entirely different reform package. I guess they could take it into negotiation and come out with a transportation bill if they really wanted to.

However, I believe those kind of fundamental changes would be easier to make on a bill that actually made structural changes in how Social Security operates, than it would be in a simple accounting bill.

It's just a thought. I think it's better to have several fallback alternatives than it is to place all your eggs in one basket.

Diamond & Orszag address this problem. They would have an annual adjustment by Social Security actuaries based on what the mortality rate was doing. The increased cost would be allocated 50% to the retirement age and 50% to benefit reductions for workers under 59. Once a worker reached 60 their benefit schedule could not be changed.

Diamond & Orszag also mention an early retirement option for workers with physical jobs, but how that part works is vague.

They slowly increase the FICA deductions for both workers and employer until both parties contribute 7.09% in 2055. They also raise the payroll cap to $111,000 and add a 3% legacy tax to all income over the cap.

Diamond-Orszag is a comlpex plan and our first choice should be to completely block any reform by Republicans because they are basically untrustworthy. As a backup strategy, I like the idea of a lockbox, just as a matter of political strategy. It puts a lot of heat on Bush and the Republicans and makes it very difficult for them to explain their opposition.

I would hold the Diamond-Orszag plan in deep reserve as a final option if the first two options were not sufficient to block other changes by the Republicans. It is genuine progressive reform that strengthens Social Security and adds additional protection in a number of ways. But I wouldn't trust Bush or the Republican party with any bill in a House/Senate negotiating session.

Hell, after the Medicare Prescription Drug bill, I don't know how any Democrat can vote on any legislation in good faith. Who knows what the final bill is going to look like?

My understanding is that the Treasury issues the special nontradable Social Security bonds in exchange for using the surplus for operating expenses. The result is to provide some marginal stability to the price/interest rate of the weekly treasury auction, because the required dollar amount is lowered by an amount equivalent to the amount of the surplus.

I believe the market can be assumed to have factored in the Social Security surplus to the auction price, because it is a known and predictable quantity. Other factors that are unknown or unpredictable will tend to have a greater impact on the value of both regular tradeable treasury bonds and the nontradeable Social Security bonds.

For example, today the market reacted quite strongly to a Fed announcement earlier this week that was unexpected:

Last year, during a stable period for interest rates, some analysts said they were even looking for a change in the punctuation of the Fed's comment on interest rates.

I haven't seen anything to suggest that the value of the bonds would be affected by whether they were in the trust fund as IOUs or invested in the market as hard assets. There would certainly be macro-economic effects from the change, but I don't believe they would would be dramatic.

The only people who will loan us the money when we need it are the same people who loan it to us now. The buyers of treasury notes at the weekly auction. One big threat hanging over the market is that the Chinese and Japanese, among others, will decided to stop buying the full auction because the dollar is dropping against the euro.

There are people a whole lot smarter than me who are calling this one both ways. I don't know when or if it will happen. For now, the U.S. economy is still a very safe haven.

By the way, whats more likely to exist in 40+ years when I start drawing from social security? Social security or a robot that will have radically transformed everything? Social security or massively extended life? Social Security or an America with 10% (or less) of the worlds wealth, power, and influence as opposed to 25%? Perhaps you can see why fighting for social security is not my priority.