However valid the reasons may have been to establish the accounting conventions the federal government currently uses for trust funds, those conventions confuse almost everyone: the Congress, the media, government officials, and most of all, the public.
I believe the main source of that confusion is the fact that the
federal government's trust funds are not trust funds in the traditional
sense; that is, they do not set aside current income for future use.
Excess income over outgo for any given trust fund is invested, in a
certain sense, in special Treasury securities, which are as safe and
secure as all other Treasury debt. But the Treasury securities held by
federal trust funds are nothing more than the government's IOUs to
itself. Look at it this way: if the government had truly invested trust
fund net income for future use, the Treasury would currently be holding
hundreds of billions of dollars of real assets that could be liquidated
in the future to pay for future obligations. But the Treasury does not
hold any net assets; in fact, all that remains from the so-called
investment of trust fund surpluses is net debt to the public of $3.7
trillion.
Although there is no money in the Treasury to pay for future
obligations, the obligations to people eligible for Social Security
benefits are real. And most important, those obligations are a direct
result of federal law, not a consequence of whatever may or may not be
credited to the trust funds. In particular, the size of the balances in
the Social Security trust funds--be it $2 trillion, $10 trillion, or
zero--does not affect the obligations that the federal government has
to the program's beneficiaries. Nor does it affect the government's
ability to pay those benefits.
This fact is explicitly recognized in the President's budget for
fiscal year 2000 in the same words used in previous budgets. To quote
page 337 of the Analytical Perspectives volume: ``The existence of
large trust fund balances, therefore, does not, by itself, have any
impact on the government's ability to pay benefits.'' The fact that
trust fund balances are unrelated to the government's obligation or
ability to pay benefits needs to be recognized before any proposals to
address the Social Security and Medicare trust funds can be analyzed.
In other words, look first to the impact of proposals on increasing
national saving and raising real growth and then to the impact on
paying down the debt held by the public.
Let me apply those principles to the Social Security trust funds.
In their most recent report, the Social Security trustees estimate that
the trust funds will not be exhausted until 2032. However, the report
also includes the fact that starting in 2013, Social Security taxes
will not be sufficient to meet obligations. If the Social Security
trust funds were trust funds in the traditional sense, their assets
could be sold to cover the shortfall. However, as stated above, the
surpluses in the trust funds have been loaned to the federal
government, and although special bonds have been issued to indemnify
the funds, the bonds are nothing more than the federal government's
IOUs to itself. Starting in 2013, the program's expenditures will
exceed payroll taxes, and the government will eventually have to go
further in debt, raise taxes, cut spending, or infuse more general
revenues to be able to send out Social Security checks. We must look
beyond the balances in the trust funds to be able to properly evaluate
any proposal.