Social
Security benefits, like all other
government outlays, must be paid for each year either by taxes or
borrowing,
i.e. deficit spending. When a federal trust fund is credited with
more income
than outgo, the trust fund ‘balance’ increases. Exactly what does
that
mean?
Writing IOUs to Yourself
In fiscal year 2005, the federal government ran a $364
billion
deficit. That means it spent every dollar of tax receipts, plus
$364
billion it borrowed from the public. That is, it sold Treasury
bills,
notes, and bonds to any entity outside the federal government,
including
domestic individuals and companies, banks, state and local governments,
as well
as foreign individuals and central banks.
If it spent
everything it received and spent
an additional $364 billion of borrowed money, how could it credit
a trust fund balance? The answer is: by writing
IOUs to itself. That is, the government issued its own securities
to
itself in that amount. Unlike debt created when it sells
securities to
outside entities, the bonds that constitute the trust fund ‘balances’
are
neither debts nor assets, rather they are essentially meaningless
bookkeeping
entries.
Canceling IOUs to Yourself
In the case
where a trust fund program
spends more than it takes in, the outlays are still funded the same way
that
all outlays are funded: by tax revenues and borrowing from the
public to
make up the shortfall. But the trust fund balance is reduced by
the
amount of the shortfall. What does that mean? It means the
federal
government cancels debt to itself by ‘redeeming’ some of the bonds it
issued to
itself.
Just as I
incur no debt by issuing an IOU to
myself, neither do I decrease my liabilities or increase my assets by
canceling
such an IOU. The same is true of the federal government.
The
government acknowledges this in the FY 1996 budget document entitled Analytical Perspectives,
p. 258, where it says:
“These balances
are available to finance future benefit payments and other trust fund
expenditures – but only in a bookkeeping sense. Unlike the assets
of
private pension plans, they do not consist of real economic assets that
can be
drawn down in the future to fund benefits.”
When a Trust Fund Balance
Reaches Zero
What happens
when a trust fund is
depleted? Nothing,
because the trust fund balance does not pay for program outlays.
Current
tax receipts and borrowing from the public pay for all program
outlays.
Future benefit payments must be paid out of future tax collections and
borrowing.
Furthermore
the amount spent by a program
like Social Security is determined by the beneficiary formulas written
into the
law. Until the formulas are changed by amending the law, the
federal
government must make good on those obligations. The trust fund
balances
are irrelevant, both financially and legally.
The Real Meaning of a
Government Trust Fund
The very use
of the term trust fund
when applied to federal trust funds is
misleading. As the government puts
it in Analytical Perspectives, FY
1996, p. 251:
“The Federal
budget meaning of the term trust differs significantly from its
private
sector usage. In the private sector, the beneficiary of a trust
owns the
income generated by the trust and usually its assets. A trustee,
acting as
a fiduciary, manages the trust assets on behalf of the
beneficiary. The
trustee is required to follow the stipulations of the trust, which he
cannot
change unilaterally. In contrast, the federal government owns the
assets
and earning of federal trust funds, and it can raise or lower future
trust fund
collections and payments, or change the purpose for which the
collections are
used by changing existing law.”