Trust Funds and Measures of Federal Debt

The federal government uses several accounting mechanisms for linking earmarked receipts (money designated for a specific purpose) with corresponding expenditures; some of those mechanisms are trust funds (such as the Social Security trust funds), others are special funds (such as the fund the Department of Defense uses to finance its health care program for military retirees) or revolving funds (such as the Federal Employees Group Life Insurance fund). Although trust funds are designated as such by law, there is no substantive difference between trust funds and the other types of funds.

When trust funds and other government funds have receipts in excess of amounts needed for current expenditures, they are credited with nonmarketable Treasury debt known as government account series securities. At the end of 2009, about $4.3 trillion in such securities was outstanding, mostly credited to the Social Security trust funds. (That amount can serve as a measure of how much receipts, including interest, have exceeded outlays over time for the programs financed through those funds.) The value of the outstanding securities (that is, the debt held by government accounts) is combined with the amount of debt held by the public (described in Chapter 1) in two measures of the government’s debt: gross federal debt and debt subject to limit.

In total, the federal budget has more than 200 trust funds, although most of the money is credited to fewer than a dozen of them. Among the largest trust funds are the two for Social Security (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance [DI] Trust Fund) and the funds dedicated to Medicare’s Hospital Insurance (HI) program (also known as Part A), civil service retirement, and military retirement.

When a trust fund receives payroll taxes or other income that is not needed to pay benefits immediately, the Treasury credits the fund and uses the excess cash to reduce the amount of new federal borrowing that is needed to finance the governmentwide deficit. That is, if other tax and spending policies are unchanged, the government borrows less from the public than it would in the absence of those excess funds. The reverse is the case when revenues for a trust fund program fall short of expenses. Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.

Including the cash receipts and expenditures of trust funds in the budget totals along with receipts and expenditures of other federal programs is useful for assessing how all federal activities taken together affect the economy and financial markets. Therefore, the Congressional Budget Office (CBO), the Administration’s Office of Management and Budget, and other fiscal analysts generally focus on the total deficit rather than on the deficit with or without particular trust funds. That comprehensive view of the government’s fiscal activities is often called the "unified budget."

According to CBO’s current baseline projection, trust funds as a group are expected to run a surplus of $119 billion in 2010 and $1.6 trillion from 2011 through 2020 (see Table D-1).That surplus is bolstered by interest and other sums transferred from elsewhere in the budget. Such intragovernmental transfers, which are projected to total $590 billion in 2010, reallocate costs from one category of the budget to another but do not directly change the total deficit or the government’s borrowing needs. If intragovernmental transfers are excluded and only income from sources outside the government is counted, the trust funds as a whole are projected to run annual deficits that will increase from $471 billion in 2010 to $907 billion in 2020.

a.	Includes Civil Service Retirement, Foreign Service Retirement, and several smaller retirement trust funds.

b.	Primarily trust funds for railroad workers’ retirement, federal employees’ health and life insurance, Superfund, and various insurance programs for veterans.

Includes interest paid to trust funds, payments from the Treasury’s general fund to the Supplementary Medical Insurance program, the employer’s share of payments for employees’ retirement, lump-sum payments to the Civil Service and Military Retirement Trust Funds, taxes on Social Security benefits, and smaller miscellaneous payments.

Total trust fund surpluses are dominated by those for the Old-Age and Survivors Insurance portion of the Social Security program. Including interest and other intragovernmental payments, CBO estimates a surplus of $110 billion for that fund this year and a cumulative surplus of nearly $1.5 trillion from 2011 through 2020. The DI program is projected to run annual deficits through the entire projection period. For Social Security as a whole, the estimated surpluses peak at $139 billion in 2015 and decline to $107 billion in 2020. Excluding interest (which accounts for the bulk of the intragovernmental transfer), surpluses for Social Security become deficits of $28 billion in 2010 and $202 billion over the period from 2011 to 2020 (see Figure D-1).

In the absence of legislative action, the Highway Trust Fund, the DI Trust Fund, and the HI Trust Fund will exhaust their balances during the baseline period, CBO projects. The Highway Trust Fund required an infusion from the Treasury’s general fund of $7 billion in 2009. Depending on cash flows, the Highway Trust Fund could again be unable to meet obligations in a timely manner in 2010; CBO estimates that a transfer of several billion dollars could be needed to maintain the balance above the $4 billion that the Department of Transportation suggests as a minimum. Because the rate of unemployment is projected to remain high, CBO estimates that the Unemployment Trust Fund, which received $8 billion from the general fund last year, will require another $50 billion in 2010. That transfer was provided for in the Consolidated Appropriations Act of 2010.

Economic weakness and rising health care costs are projected to cause a continuing decline in the balances of the HI and DI Trust Funds during the baseline period. CBO projects that the HI fund will exhaust its balance in 2016 and the DI fund will be exhausted in 2018. Once balances are exhausted, the programs eventually would be unable to immediately cover their obligations.

At the end of 2009, debt held by the public totaled approximately $7.5 trillion. In CBO’s current baseline projections, that measure of debt will soar to $15 trillion in 2020. Debt held by the public (see Chapter 1) is the most meaningful measure for assessing the relationship between federal debt and the economy because it represents the amount that the government has borrowed in the financial markets to pay for its operations and activities; such borrowing competes with other participants in credit markets for financial resources. In contrast, debt held by trust funds and other government accounts represents internal transactions of the government and thus has no effect on credit markets. Combined, debt held by the public and debt held by government accounts form the basis of two other measures of debt: gross federal debt and debt subject to limit.

Gross federal debt consists of debt held by the public and debt issued to government accounts. CBO projects that, under current law, gross federal debt will increase in every year of the 2010–2020 period, reaching $21.4 trillion in 2020—roughly 80 percent more than its total of $11.9 trillion at the end of 2009 (see Table D-2). That increase stems from a near doubling of debt held by the public and an increase of 48 percent in debt held by government accounts; the latter mostly represents the impact of the cumulative trust fund surpluses projected over the next decade.

The Treasury’s authority to issue debt has a statutory ceiling. Although the limit applies to debt held by the public and by government accounts, it does not include debt issued by agencies other than the Treasury, which is included in debt held by the public and gross federal debt. That debt includes the $23 billion issued by the Tennessee Valley Authority and the $12 billion issued by the Federal Financing Bank.¹ The current debt ceiling, which was set in December 2009 in Public Law 111-123, is $12.394 trillion. By CBO’s estimates, under current policies, that ceiling will be reached early in calendar year 2010 (see Figure D-2).