by MARK ADKINS
Knowledge is power and the American people, regardless of their individual differences in political philosophy, deserve accurate information upon which to make decisions. This article was written to expose three creative deceptions through which politicians of both parties routinely manipulate public opinion about one of the largest portions of federal spending: social programs associated with the federal trust funds. Social Security and Medicare will be used as exemplars.
The deceptions are as follows: (1) that federal trust fund balances finance these programs; (2) that the public owns these balances; (3) that these balances represent claims for future benefit payments.
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 private interests 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 securities that 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 securities 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 of the United States document entitled Analytical Perspectives, "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."(1)
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 Medicare outlays.
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. Issuance of debt to trust funds does "not represent either current transactions of the Government with the public or an estimated amount of future transactions with the public. For example, if the account records the transactions of a retirement program, the debt that it holds does not represent the actuarial present value of future banefits."(2)
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: "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 existing law."(3)
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 intragovernmental transfers.
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).
Intra-governmental 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 securities issued by the government to itself. Since these are interest bearing, the government must then pay itself interest! This is effected by an intra-governmental transfer from a different government account to the trust fund account. Of course, such a transfer has no effect 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, intra-governmental transfers have no affect on the deficit. "Issuing debt to Government accounts does not have any of the economic effects of borrowing from the public. It is an internal transaction between two accounts, both within the Government itself."(4)
Intra-governmental "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 intra-governmental 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 intra-governmental interest and contributions transfers are included, the Social Security Trust Fund had a surplus of $56.8 billion. This is the amount of bogus securities the government issued to itself for that trust fund. The real surplus, $17.4 billion, was used as an offset to general expenditures, an action which the government brags about as a method of reducing the deficit but which in actuality was a general tax increase hidden in FICA taxes during the 1980s under the guise of "prefunding" benefits: prior to this time Social Security had generally levied only the taxes necessary for the payment of benefits.(5) Since the trust fund securities cannot and do not finance program expenditures, this is clearly a deceitful abuse of language.
While it's true that "a trust fund must use its income for purposes designated by law," this law requires any surplus to be "invested" in Treasury securities.(6) 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 assets.
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 Democrat-controlled Congress has 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.
A final note on recent developments in the trust fund scam. Congress has balked at raising the federal debt ceiling, which determines the maximum amount of outstanding U.S. government debt. There has been some "dipping into the trust funds" -- whether federal employee retirement trust funds, Social Security trust funds, or others.
Even though these federal government "trust funds" do not contain real economic assets, it is nevertheless possible to get around the debt ceiling by reducing trust fund balances.
The reason is that the federal debt ceiling is (with minor exceptions) a ceiling on the gross federal debt, not just on the debt to the public. So, it includes not only marketable U.S. Treasury securities, but also the nonmarketable special securities which the government issues to its own accounts.
In getting around this debt ceiling, the real need is the need to issue debt to the public (chiefly but not exclusively marketable Treasury securities), so that the government can borrow money to fund its ongoing expenditures. Since the Government Account Series securities in the trust funds are owned by the government, and are meaningless IOUs from itself to itself, it can cancel these as it pleases (though always described in other terms better suited to public relations). This reduction in the trust fund government account debt will lower the gross national debt, thereby allowing the government to issue marketable Treasury securities yet keep the gross national debt beneath the ceiling.
This is not "borrowing." There is nothing in the trust funds to borrow. This is an accounting trick which allows marketable Treasury securities to be issued within the debt ceiling. If the government does cancel out some trust fund debt in this fashion, it will call it "borrowing" in order to maintain the illusion that the trust funds mean something, and if in future it issues new debt to its own government trust fund accounts, it will call this "repaying." This will not be repaying, since there will never have been any borrowing from the trust funds. One cannot borrow from IOUs written by one's self to one's self.
There was also a bill in Congress (since dropped) which included provisions prohibiting the Treasury from "borrowing" from the trust funds in this fashion. This was simply a way to keep the government from issuing marketable Treasury securities to the public, in order to keep the heat on the President to accept Republican budget priorities, without actually admitting that the trust funds are one big scam. It lets the Congress sound like it is protecting "your" trust fund assets when in reality it is simply a political ploy.
Mark Adkins is a free-lance writer based in Phoenix, Arizona.
Footnotes:
1 Executive Office of the President. Office of Management and Budget Analytical Perspectives, Budget of the United States Government, Fiscal Year 1996. Washington, D.C.: U.S. Government Printing Office, 1995.
2 Ibid.
3 Ibid. p. 251
4 Ibid. p. 188
5 Ibid. p. 258
6 Ibid. p. 251