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Federal lawmakers have found many ways to shift the responsibility for today’s spending to tomorrow’s taxpayers. But among the most important is their habit of abandoning the fiscal discipline that should accompany government trust funds.
A new bill, the Bipartisan Trust Act, may focus new attention on this issue. Sponsored by Senators Mitt Romney (R-UT) and Joe Manchin (D-WV), Representatives Mike Gallagher (R-WI) and Ed Case (D-HI), and a bipartisan group of other members of Congress, the proposal would create commissions to recommend changes whenever a trust fund approaches insolvency and has insufficient assets to pay its bills.
The federal government operates a half-dozen major trust funds as well as a number of smaller ones. The biggest, of course, are for Medicare and Social Security, but it also operates trust funds to pay for highways, airports, military and federal civilian retirees, and unemployment insurance.
These funds implicitly obligate the government to serve as trustee for the taxes and payments collected specifically for those programs. But many trust funds chronically fall short of money and rely on the federal general fund to pay obligations.
Unlike privately established trust funds to support specific activities, where assets are accumulated to pay future obligations, programs such as Social Security and Medicare mainly operate through pay-as-you-go financing. The government immediately disburses almost all the dedicated taxes paid by current workers to recipients, generally from older generations; current workers receive benefits by depending upon succeeding generations to pay over the necessary taxes.
For decades, government has allowed the “trust fund” label to perpetuate the myth that the payroll taxes current workers pay are being held in reserve for their own Social Security and health benefits in retirement. While that is largely untrue, it does not exempt policymakers from their obligation to protect future generations by requiring that over time cumulative spending be covered by cumulative dedicated taxes.
When Franklin Roosevelt’s administration was drafting the Social Security bill in 1935, the president opposed an early version that would have left the fund in deficit by 1980. Sylvester Schieber and John Shoven, report on his objection, as recounted by his labor secretary Francis Perkins:
"This is the same old dole under another name. It is almost dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980. We can't do that. We can't sell the United States short in 1980 any more than in 1935."
Unfortunately, Congress largely has abandoned this Rooseveltian degree of fiscal prudence.
Medicare may be the most striking example of this abandonment. Medicare Part A hospital insurance was funded through a piece of the Social Security payroll tax. But Congress did not want to raise taxes even more to fund Part B that covered doctors’ fees and other outpatient care. So, it funded Part B through general revenues, supplemented by premiums. A half-century later, it did the same thing for Part D drug insurance.
Yet Congress still applied the label “trust funds” to these programs even though effectively they simply transferred general revenues to doctors, drug companies, and other health providers.
By doing so, Congress turned the public trust fund concept upside down.
Instead of limiting benefits to the amount of dedicated taxes collected on behalf of the program, Congress structured the programs to pay out open-ended benefits that generally rose with costs. Any shortfall would be taken from general funds, often financed through borrowing.
Meanwhile, even for Part A of Medicare and Social Security cash benefits, Congress historically set the tax rate too low to cover future liabilities even on an annual basis, leaving to future elected officials the responsibility to raise taxes or reduce benefits.
Then Congress played accounting games. As the Part A trust fund dwindled, Congress shifted some inpatient costs to Part B. When Social Security’s Disability Insurance trust fund was about to run out of money, Congress transferred funds from the Old Age and Survivors Insurance trust fund, leaving to a future Congress how to fill that program’s growing fiscal hole.
This takes us back to the Bipartisan Trust Act. If it becomes law, one can only hope that its reforms establish new standards for trust fund financing, at a minimum following Roosevelt’s dictum to not “sell the United States short” by requiring future taxpayers to pay even higher tax rates for obligations being incurred today.
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