Trust Fund or Bust Fund?

The January 2001 GAO REPORT FEDERAL TRUST AND OTHER EARMARKED FUNDS. A1.9 The vast majority of earmarked funds take in more than their current needs. On an annual basis, this is often described as having a “surplus”. The accumulated surpluses result in these funds having a “balance.” The balances of earmarked funds are assets of the funds in that they provide a claim on the general fund of the Treasury for future spending. However, the balances are not cash. As with all other money collected by the government, the general fund of the Treasury receives the actual earmarked taxes and fees paid by the public. Treasury then credits these collections as assets (often in the form of Treasury securities) to the appropriate fund accounts. From the general fund’s perspective, these fund assets are a liability. From the standpoint of the government as a whole, the earmarked funds’ assets and the general fund’s liabilities offset each other so that neither an asset nor a liability is shown for the federal budget.” To the extent that future annual outlays from trust funds exceed their annual receipts, Treasury will have to use cash receipts generated by the general fund. If the budget continues to be in a deficit situation, cash to pay trust fund obligations would need to be generated by either increased tax receipts or borrowing. The latter would entail transferring Treasury debt held by the trust funds to Treasury debt held by the public. A massive increase in the statutory Debt ceiling would be required. Let’s just admit it. These funds are bust. It really is not too early to face up to the problem. We should stop using Trust fund offsets and other gimmicks such as the offbudget government-sponsored enterprise (GSE) to mask the true financial condition of this nation. A prime example of such sleight of hand is the Resolution Funding Corporation (REFCORP). This agency was started to hide and finance most of the costs of the government’s rescue of the savings and loan deposit insurance system. This agency carries the $950 Billion in debt, not the Congressional budget. These types of actions make the budget numbers look good but they hide the true magnitude of the problem. But they can’t hide forever. The combined Social Security trust funds are projected to reach the point at which current expenditures exceed annual cash receipts by 2015. We should embrace this information and not ignore it. If the plan for all future trust fund payments is centered around this model and there are no credible plans to repay the existing debt then the supply of money will grow at least accordingly. Plan on it.

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