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Tax Policy Center
   Entry 7 of 8  

Taxes and the Budget: What does it mean for a government program to be "off-budget"?

In the late 1960s the federal government adopted a unified budget that included trust fund operations along with budgets for almost all other federal activities. Since then various agencies have attempted to escape budget discipline by moving off-budget, but most have been brought back under pressure from advocates for fiscal responsibility. Today there are only two off-budget entities that were once on-budget: the Social Security system and the U.S. Postal Service. In the case of Social Security, only the trust funds (for Old-Age and Survivors Insurance and for Disability Insurance) are off-budget; administrative costs are on-budget. The Federal Reserve System and the various government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, have always been off-budget.

  • Social Security was temporarily taken off-budget by the Gramm-Rudman-Hollings Act of 1985, and its off-budget status was made permanent by the Budget Enforcement Act of 1990. There were a number of reasons for taking Social Security off-budget:
    • Social Security’s off-budget status would protect benefits from being reduced by the reconciliation procedures that are an important part of the budget process. Although Social Security’s off-budget status thus provides considerable protection against benefit reductions, the Congress did not want to encourage benefit increases or payroll tax cuts either. The House of Representatives therefore created a point of order against legislation that would increase Social Security’s seventy-five-year actuarial deficit by more than 0.02 percent of payroll or reduce the five-year cash flow balance of the system by more than $250,000. The Senate established a point of order against legislation that would reduce the Social Security surplus during the period covered by the budget resolution (generally five years).
    • Since 1983, Social Security trust funds have accumulated large surpluses that will eventually be needed to pay promised benefits. Indeed, they are not sufficient for that purpose. It was therefore argued that the Social Security surplus was not a true surplus, but rather an advance payment for future benefits that should be separated from the surplus or deficit of the rest of government. It was hoped that this separation would induce greater fiscal discipline in the rest of the government, ideally leading to a balanced budget in the activities of government outside of Social Security.
    • Those goals have not been fulfilled. Despite the formal separation of Social Security from the rest of the budget, budget debates in Congress and the media focus mainly on the unified budget balance, that is, the combined balance of Social Security and the rest of government. Many argue that the Social Security surplus consequently masks the true deficit of the federal government. In the more than two decades that Social Security has been off-budget, the rest of government has run a surplus in only two years: 1999 and 2000.
    • Because the rest of the federal government is, in effect, borrowing from Social Security to finance part of its deficit, some accuse the rest of government of "stealing" from Social Security. In fact, Social Security trust funds invest their surplus in Treasury securities bearing the full faith and credit of the United States. The interest rate on these securities is determined by a formula that reflects market interest rates. The rest of government is no more stealing from Social Security than it is from an individual who invests some of his or her pension fund in U.S. Treasury securities.
  • The U.S. Postal Service was taken off-budget to make it free to adopt efficient business practices, but this is not a sufficient excuse, since many business-type activities of the government, such as selling mortgage insurance, are on-budget. GSEs are off-budget because they are owned by private shareholders, and their debt does not bear the full faith and credit of the U.S. government. However, most observers believe that their close ties to government would lead to a government bailout if they get into financial trouble. It is therefore argued that they should be subjected to controls over their budgets. This is not done within the formal budget process, but strict regulatory controls have been imposed on Fannie Mae and Freddie Mac.
  • The central banks of most democratic countries are off-budget. This helps to preserve their independence from the other branches of government. If the Federal Reserve were on-budget and its expenditures had to be appropriated, the Congress might conceivably make its appropriation contingent on lowering interest rates or making some other change in monetary policy.
  • Various small agencies have successfully escaped the unified budget for short periods. The special interests that back these agencies believe, probably rightly, that lawmakers will treat them more generously if doing so does not increase the official budget deficit. Advocates of fiscal discipline work hard to bring off-budget agencies back into the fold and to prevent new agencies from going off-budget. With the help of the Gramm-Rudman-Hollings Act of 1985, this effort has been largely successful. The Rural Development Bank, the Export-Import Bank, the Strategic Petroleum Reserve, and the Pension Benefit Guarantee Corporation all were moved off-budget for varying periods in the past but are now on-budget.
   Entry 7 of 8