Time to End Washington’s Trust Fund Gimmicks

By :: March 16th, 2012

Why do we bother with government trust funds? As the Senate’s just-passed highway bill proved yet again, Congress is turning these funds into little more than accounting shams.

In theory, it makes sense to establish special accounts where designated revenues are set aside for a specific purpose. But in practice, Washington is grossly abusing the idea.

There is a lot of money at stake here. The national debt this year will reach almost $16 trillion. Of that, the government owes nearly $5 trillion to itself. That's because Congress spends trust fund dollars on the rest of government and replaces the money with IOUs. But, as with the highway fund, the game works the other way too: The trust funds live on general revenues instead of designated taxes.

With that in mind, let’s take a quick tour of The Big Three funds:

The highway trust fund. The federal government was supposed to fund its share of highway and transit costs with six excise taxes (let’s call them the gas tax, but there are other levies as well).

The scheme worked—for a while.  But while Congress has more than doubled federal highway spending over 20 years, it hasn’t increased the 18.4 cents per gallon gas tax since 1993. And cars have become more fuel efficient.

So, guess what? Trust fund balances that were once stable have now gone into the red. To fill that fiscal pothole, Congress has had to shift almost $35 billion from the general fund since 2008.

The other day, Senator Bob Corker (R-TN) correctly noted the highway bill the Senate was about to pass would make this problem worse. He opposes raising the gas tax so suggested Congress could either spend less on highways or cut other programs to offset the cost.

But he misses the point. The more we pay for highways with general revenues or by cutting other spending, the more transportation looks like any other government program. Why have a trust fund?

Medicare: Money flies from Medicare to the general fund and back at dizzying speed.

The Medicare payroll tax finances only part of one piece of Medicare—the hospital insurance program (Part A). In 2010, Part A collected only about $180 billion in payroll tax--$70 billion less than it spent. That’s why it will run out of money in a bit more than a decade.

The rest of Medicare, which paid out about $275 billion in 2010, gets no money from payroll taxes. While it collected about $62 billion in premiums, more than 40 percent of total Medicare dollars come from income taxes and other general revenues.

Thanks to the 2010 health reform law, what’s loosely called the Medicare tax will rise significantly for some high-income people starting next year. But only a 0.9 percent rate increase on wages will go to the Part A trust fund. Medicare will never see the rest (a new 3.8 percent tax on investment income). Rather, it will go to the general fund to help “pay for” health reform.

Social Security. You know the story here. Social Security uses current payroll tax revenues to pay current benefits. There is no real link between the size of the trust fund and what government owes current and future retirees.

The system now pays out more each year than it collects in taxes. And the immensely popular payroll tax cut on the books for 2011 and 2012 reduced income to the program by more than $200 billion. Congress has filled this hole by shifting other tax dollars to the retirement system. Now it must cut spending, borrow, or raise other taxes to cover this transfer.  Some trust fund.

Don’t get me wrong. There is real value to trust funds. But if we are going to have them, we should take them seriously.

18Comments

  1. Time to End Washington’s Trust Fund Gimmicks | Tax Information  ::  9:36 am on March 16th, 2012:

    […] is the original post: Time to End Washington’s Trust Fund Gimmicks Posted in News Tags: books, budget, government, highway, highway trust fund, money, […]

  2. Vivian Darkbloom  ::  10:52 am on March 16th, 2012:

    The trust fund are shams because those fund are generally required by law to lend all of their reserves to the Treasury for to finances deficits in other budget areas. And, investment in those Treasuries is often at disadvantageous rates.

    The situation would be quite different if, say, the social security trust fund were allowed (or required) to invest its reserves in a global weighted index of stocks, bonds, sovereign obligations, etc. Such a diversified portfolio strikes me as a less risky and more lucrative way to invest reserves than merely in US Treasury IOU’s. Congress would then be required to either raise more tax revenues or raise more money from other sources in the debt market (or maybe even cut some of that spending).

    A variation of this has actually been proposed by Laurence Kotlikoff, a Boston University economics professor who has announced he is running for president as a third party candidate. He calls it the “Purple Social Security Plan”. He is, to my knowledge, the only economist to have ever run for that post.

    Kotlikoff does not have any chance of being elected president. But, his ideas are much more creative and sensible than those of other candidates who do have a chance of getting elected. Perhaps TaxVox should devote some energy to critiquing his Purple Plan ideas.

    http://www.thepurplesocialsecurityplan.org/node/3

  3. Michael Bindner  ::  5:22 pm on March 16th, 2012:

    Trust funds are only a problem if not adequately funded. The gas tax must go up. Eventually, health care costs should be funded with a single employer-paid VAT-like net business receipts tax – with offsets for employer provied care for employees and retirees (without offsets, a VAT is just as good – however offsets could a source of price competition with any publicly funded care, especially long term care).

    Investing Social Security in index funds is a non-starter, given the recent global market crash – unless of course you gauranteed value irregardless of market conditions – in which case outside funding would be a sham and a handout to the financial services industry. Not only no, but H E double upside down 7s no! Such investment would crowd out more direct investing and would either result in an industrial policy or in yet more unaccountability by management.

    The only way to do any kind of private account is to invest the funds in insured employee-ownership, where part of the investment in employer voting stock goes to a fund holding similar employee owned shares who can intervene if petitioned to do so by some percentage of the firm’s employee-owners, say 25% of the shares. If 33% is the amount in the insurance fund, this essentially gives the fund and dissidents the ability to examine the books and fire management if they are pulling an Enron or are going the opposite way and being too conservative. I expect most apologists for capitalism would blanch at such a proposal, however, and would rally the Tea Party to save Social Security rather than face actual accountability.

  4. AMTbuff  ::  2:25 pm on March 17th, 2012:

    Where trust funds exist in the private sector, misusing trust funds is a crime that will send you to jail. Misusing public sector trust funds gets you re-elected.

    The problem is a trust fund from which the government is permitted to borrow is not a trust fund. Call it something else, perhaps a “willing suspension of disbelief” fund. Or call it a Dream fund, which after it is raided becomes a Nightmare fund.

  5. Vivian Darkbloom  ::  3:32 pm on March 17th, 2012:

    “Trust funds are only a problem if not adequately funded”

    Michael, you are completing missing the point. Funded with what? Under current rules our federal trust funds are “funded” with only one thing: IOU’s from the left hand of government. And, those IOU’s are, in turn, funded through general borrowing.

    Exactly what “funding” are you referring to?

    AMTBuff, commenting above, seems to get the joke. It really is a “willing suspension of belief fund”.

  6. Michael Bindner  ::  7:13 am on March 19th, 2012:

    Howard’s point is that the taxes that support the highway trust fund are too low to even fund operations. They need to go up.

    To pay back the Old Age and Survivors Fund, it is not appropriate to borrow in the long term. Income Taxes at the higher rates need to go up, since the trust fund itself was built up in order to avoid repealing the Reagan tax cuts in the first place.

  7. Vivian Darkbloom  ::  3:44 am on March 20th, 2012:

    Michael,

    If “Howard’s point” is that taxes are too low to even fund operations, then there is no need to even discuss a “trust fund”. The purpose of a trust fund is to hold funds out of reach of other spending so that those funds can be spent in the future for their intended purpose.

    “To pay back the Old Age and Survifors Fund it is not appropriate to borrow in the long term”. But, it is also not appropriate to borrow in the short term. Again, otherwise, there is no “trust fund”.

    Consider this: Bob, a crack addict, wants to put aside some money for his daughter’s education. Bob decides to set up a “trust fund” by placing $10 each week that he earns in his right pocket. Bob puts the $10 in his right pocket, but immediately switches it to the left pocket, noting that he will pay the right pocket back later (with interest!). Bob then takes the money from his left pocket and buys some crack to support his addiction. He rationalizes this by thinking he can always earn or borrow sufficient funds in the future to put into his left pocket, enabling the left pocket to pay the right pocket back (with interest!) As for his addiction, he’ll deal with that, too, but not today.

    How much money has Bob funded his daughter’s trust fund with? It seems to me you are arguing (and perhaps Howard, too) that if Bob just repeats the whole process by transferring $20 from his right to left pocket and then to his dealer, the problem will be solved. In fact, Bob has doubled his problem.

    I think Bob has put zero into that fund. I also think Bob needs to deal with this addiiction and the self-delusional rationalizing that goes along with it.

  8. Weiwen  ::  1:39 pm on March 20th, 2012:

    I agree with Gleckman in that the trust funds are mere accounting entities. However, Americans will go crazy. Vivian’s comments are instructive: Americans already feel like Social Security is going bankrupt because its trust fund isn’t real.

    It’s true that Social Security is a pay as you go program, meaning that people now are paying for their parents. It’s also true that the population is aging.

    However, it is most emphatically NOT true that our population is in decline. We have all expectations that our GDP – the sum total of all the resources that we produce – will continue to increase. If we get to a situation where our GDP isn’t increasing, then we will have bigger problems than Social Security (probably an asteroid has hit, aliens have landed, miscellaneous social collapse).

    As a matter of fact, if our GDP starts actually shrinking, then our publicly traded companies won’t be doing so well, either.

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