The Public Trust: Protecting the Savings of the Trust Funds from the Unified Federal Budget

Abstract

For decades, the federal government has maintained a “unified budget” that incorporates trust funds rather than splitting them off into separate ledgers. The goal of the unified budget concept is to ensure that the budget expresses the full scope of the federal government’s role in the economy. Some research and theory suggest that the unified budget poses a threat to the trust funds’ accumulation of savings to pay the long-term costs of the programs with which they are associated. Because trust fund surpluses reduce the perceived size of the deficit under the unified budget, they may have an impact on policymakers’ decisions on other fiscal matters. If government is induced to spend more or tax less for each dollar saved by the trust funds, then the funds’ asset accumulations misrepresent the real savings achieved by the government for programs’ long-term liabilities. This thesis addresses two research questions in two parts: 1) Does the presence of trust funds in the unified budget undermine their ability to save for long-term liabilities? 2) If so, what kinds of budget reform policies might better protect the trust funds? Part 1 examines the basic problem posed by the unified budget. Chapter 1 explores the unified budget concept’s history. Chapter 2 reviews the theoretical problems with the unified treatment of trust funds and the associated literature. Chapter 3 extends and replicates empirical analysis conducted in some of the literature, concluding that there is some evidence to suggest a relationship between trust fund surpluses and nontrust fund deficits but that this relationship may have weakened in recent years. Chapter 4 is a case study examining the adoption of the Patient Protection and Affordable Care Act in 2010, offering micro-level analysis of the relevant political dynamics. Part 2 explores three policy approaches to protecting the savings of the trust funds. Chapter 5 highlights the example of Social Security, which was taken “off-budget” in the 1980’s. Anecdotal evidence indicates that this change did little to alter policymaker treatment of the program’s surpluses, though statistical analysis suggests the change may have reduced but not eliminated the link between Social Security and other spending. Chapter 6 examines two means by which policymakers might take the trust funds’ assets out of the government’s hands: delegation of control to non-governmental authorities or privatization of the programs. Either approach might solve the problem, but both would be difficult to achieve as a political matter. Chapter 7 focuses on the mechanics of the Pay-As-You-Go (PAYGO) rules for financing new legislation and sequestration procedures. By altering PAYGO and sequestration rules to prevent policymakers from using trust fund savings to offset the costs of new non-trust fund spending, policymakers might offer the trust funds insulation even within the unified budget framework. Ultimately, this thesis favors changes to PAYGO and sequestration as a method of budget reform. Because such changes would leave the unified budget concept intact, it is doubtful that they would foster much opposition, and they would likely be almost as effective as more radical reforms to return the budget to a non-unified concept.