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Government Trust Funds:
an essay by Mark Adkins on Usenet about 1995-6
How they Really Work
Medicare and Social Security benefits, like all other
government outlays, must be paid for each year either
by tax receipts, proprietary receipts (e.g., premiums
paid into Medicare Part B), borrowing (i.e., deficit
spending), or some combination. When a federal trust
fund is credited with more income than outgo (as is the
case with Social Security), the trust fund "balance"
increases. What exactly does that mean? Consider: In
fiscal year 1994 the federal government ran a $203
billion deficit. That means that it spent every nickel
of tax receipts and proprietary receipts, PLUS $203
billion it borrowed by issuing Treasury securities to
the public; that is, it sold Treasury bills, notes, and
bonds to any entity outside the federal government,
including domestic individuals and companies, banks,
and state and local governments, as well as foreign
individuals and central banks.
The obvious question is, if it spent everything it
received and spent an additional $203 billion of
borrowed money, how could it "credit" a trust fund
balance? The answer is, by writing itself IOUs. That
is, the government issues its own securities -- to
itself. Unlike debt to the public (when it sells
securities to outside entities to raise money to cover
deficit spending), the bonds which constitute the trust
fund "balances" are neither debts nor assets. An IOU
from me to you is a debt for me and an asset for you.
An IOU from myself to myself is neither. The same is
true of the federal government, or any other entity.
In the case where a trust fund program spends more than
it takes in, as Medicare does, the outlays are still
funded the same way that all government outlays are: by
tax receipts, proprietary receipts, and borrowing from
the public (deficit spending) to make up the
difference. But the trust fund balance is reduced by
the amount of shortfall.
What does that mean? It means that the federal government
cancels its debt to itself by "redeeming" the bonds it issued
to itself. Just as I incur no debt by writing myself an IOU,
neither do I decrease my liabilities (or increase my
assets) by cancelling such an IOU. I can write myself
IOUs all day long, tear some of them up, and my
personal finances remain unaffected. The same is true
of the federal government. The government admits as
much in the FY 1996 Budget document entitled
"Analytical Perspectives," p. 258:
"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."
So, what happens when the Medicare trust fund balance
reaches zero, or becomes negative? Nothing. Because
the trust fund balance does not pay for Medicare
program outlays. Current tax receipts, proprietary
receipts, and borrowing from the public (deficit
spending) pay for contemporaneous Medicare program
outlays. Future benefit payments must be paid for with
future collections and borrowing: the government does
not salt away real economic assets to pay for future
Furthermore, the amount spent by Medicare is determined
by the Medicare beneficiary formulas written into the
law. If XXX number of people qualify for YYY number of
Medicare dollars, then unless and 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 very use of the term "trust fund" when applied to
federal trust funds like Social Security, Medicare, and
others, is misleading. As the government itself puts
it (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's
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 earnings 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
Once you understand the basic operation of the federal
trust funds, you can begin to make other useful
distinctions. One of the most important is the
difference between public transactions and
Public transactions consist of all income to the
government from the public (e.g., taxes and voluntary
premiums collected), and of all outlays from the
government to the public (e.g., benefit payments).
Intragovernmental transfers consist of "payments"
(accounting shifts) from one government account to
another. The two main types of intragovernmental
transfers are interest payments to trust funds and
government "contributions" to trust funds.
Recall that the balances of trust funds consist of
special government bonds issued by the government to
itself. Since these are interest bearing bonds, the
government must then pay itself interest! This is
effected by an intragovernmental transfer from a
different government account to the trust fund account.
Of course, such a transfer has no affect on total
government spending or receipts, any more than shifting
$10 from my right pocket to my left pocket affects my
personal spending or receipts: it only affects my
internal accounting systems, should I choose to keep
separate books on each pocket. Thus, intragovernmental
transfers have no affect on the deficit.
Intragovernmental "contributions" are similar transfers
which are required by law (e.g., transfers into federal
employee retirement trust funds).
When determining the trust fund balances, the
government normally considers both public transactions
and intragovernmental transfers. But in determining
whether a trust fund program contributes to the
deficit, it can be useful to consider just the public
transactions. For example, in FY 1994 the Social
Security Trust Fund took in $335.0 billion in tax
receipts from the public. It spent $317.6 in benefit
payments to the public. This gave it a public
transactions accounting basis surplus of $17.4 billion.
That was a real surplus, which Congress spent.
However, when intragovernmental interest and
contributions transfers are included, the Social
Security Trust Fund had a surplus of $56.8 billion.
This is the amount of bogus bonds the government issued
to itself for that trust fund.
The real surplus, $17.4 billion, was used as an offset to
general expenditures. While it's true that "a trust fund
must use its income for purposes designated by law" (Analytical
Perspectives, p. 251), this law requires any surplus to
be "invested" in Treasury securities. Never mind that
spending the actual cash surplus on general
expenditures while writing yourself an IOU does not
constitute an "investment" in any meaningful sense of
the term: Congress interprets the law in this manner
and the public lacks legal standing to challenge this
interpretation, since by law it is the U.S. Government,
not the public, which owns the trust funds' income and
Why, then, does Congress talk about "saving" the
Medicare trust fund from insolvency? Some members of
Congress may not be any better educated than the
general public (or the media). But all of the
congressmen who serve on the committees dealing with
such matters, and a great many more, know better. The
charade is of convenience to both parties. In the
past, the Democrats have argued in favor of tax
increases to extend solvency. They are not only trapped
by their own past rhetoric, but may find such arguments
useful and effective again in the future. More
recently, the Republicans have argued in favor of
benefit cuts, using the same trust fund solvency
argument. They too find it useful to advance their own
agenda. Neither party is going to expose the other
because it would mean admitting that both parties have
misled the public for years. It would mean admitting
that Congressmen are either fundamentally ignorant, or
outrageously deceptive. As far as I can tell, this
little shell game has gone on since the beginning of
the trust funds, including those years when the federal
government was running annual total-budget surpluses
instead of deficits. A historian might know the
precise disposition of such funds, but the important
question to remember is this: what did the government
do with the cash it paid itself when it purchased its
own Treasury securities? Answer: spent it.
Of course, in future years, demographic shifts may
result in larger beneficiary populations, and this will
need to be funded either by increased taxes, decreased
benefits, or increased borrowing (deficit spending).
But this has nothing to do with the solvency of the
trust fund "balances," and neither tax increases nor
benefit cuts implemented NOW will affect the financial
condition of the programs in FUTURE years of increased
use: they will simply give Congress more money to spend
on other things TODAY.
The lapdog media, unfortunately, are either unwilling
to read the Budget of the United States Government (and
other government documents) closely enough to learn the
truth, or are simply unwilling to challenge Congress.
They tend to accept what the power players are saying
as truth, even if easily available evidence proves
They think that if the United States
Congress, and in particular those members with
expertise on the matter, are all discussing the need to
keep the Medicare trust fund solvent, then by virtue of
that fact, Congress must be both correct and honest in
Now you understand how this
aspect of the system works. Here is what you can do:
the next time you hear politicians -- of either party
-- discussing "saving the trust funds from bankruptcy,"
write a letter to those politicians accusing them of
ignorance or deceit. Simply point out that Social
Security, Medicare, etc., are pay as you go programs,
and the concept of bankruptcy simply doesn't apply.
Point out that our federal budget has been running in
the red for decades, so that even on the most general
level, the concept of bankruptcy doesn't apply.
If you don't know the address, call your local library's
telephone reference section and ask them for it. And
if the media fails to challenge this kind of
nonsensical rhetoric, write the reporters or pundits --
and the head of the network or magazine/newspaper they
appear on/in, and make the same point. Accuse them of
ignorance or complicity.
I GUARANTEE you that if enough people complain regularly
and vigorously about this kind of Establishment propaganda,
they'll worry. You don't have to be a majority, because in
their eyes (accurately or not) every letter represents a much
larger number of silent but similar individuals.
Through this multiplier, you can act with the power of
100 or 1000 men. Take the time to get involved. Don't
worry about how many other people are committed,
because the outcome will be based upon the aggregate of
*individual* actions, not on collective action.
Just do it. Your silence will be interpreted by those in
power as evidence of your stupidity and malleability.
Metaphorically kick the bastards in the teeth.