Do Federal Government Trust Funds Raise National Saving?

"Increases in the aggregate surplus of the trust funds are offset - perhaps completely - by reductions in the federal funds surplus. In fact, the trust fund surpluses result in enlarged deficits for the rest of the government."

A critical question facing America is whether the assets in the federal trust funds will help future generations of workers finance the retirements of the baby boom generation. The 1983 Social Security Reforms (sometimes referred to as the Greenspan Commission reforms) were the most sweeping in the almost 70 year history of the system. They were made under the threat of an almost immediate inability to pay full benefits to Social Security recipients. One of the key elements of the 1983 reforms involved setting the Social Security payroll tax rates above the level required to pay current benefits. That is, the Greenspan Commission's plan was for Social Security to depart from pay-as-you-go (PAYGO) financing and to partially pre-fund the retirement costs of the baby boom generation. The idea was to offer some relief to the workers in the 2015 to 2050 period in supporting the enormous retired population forecast for that period. By forcing workers in 1984-2015 to pay higher payroll taxes than required to fina nce current retirement benefits, the hope was that workers in the 2016-2050 era could pay lower than PAYGO taxes. The trust fund buildup and subsequent spend down would spread the burden of the retirements of baby boomers over 65 years, rather than 30 years, and to some degree even out the tax burden faced by different generations of workers.

Overall, the annual surplus across all trust funds increased, in constant 2000 dollars, from $16.6 billion in 1980 to $147.9 billion in 1990. The biggest trust funds went from PAYGO financing to full or partial funding. As a result of the sustained surpluses, the trust funds accumulated almost $3 trillion in assets between 1985 and 2004. Current federal budget policies treat the surplus of trust fund revenues over expenditures, and the interest received by the trust funds, as part of the unified surplus.

In Has the Unified Budget Undermined the Federal Government Trust Funds? (NBER Working Paper No. 10953), authors Sita Nataraj and John Shoven examine whether the shift from PAYGO to partially funded Social Security (and the corresponding shift in the funding of military and civil service retirement plans) resulted in a shift in national saving. The attempt to partially pre-fund Social Security benefits and to fund military and civil service pensions will tend to enlarge the unified surplus. However, if the larger unified surplus projections permit additional government spending and tax reductions, then saving by the trust funds may be partially or even completely offset by reductions in federal funds saving. The authors also explore whether larger trust fund surpluses resulted in increased personal saving.

Nataraj and Shoven find that increases in the aggregate surplus of the trust funds are offset - perhaps completely - by reductions in the federal funds surplus. In fact, the trust fund surpluses result in enlarged deficits for the rest of the government. The authors maintain that it is the existence of a unified budget that produces this offset.

The authors show that prior to the adoption of a unified budget in 1970, an increase in the surplus of the trust funds did not reduce saving by the rest of the government. The government appears to have had the ability to save before the advent of the unified budget, but has lost that ability since. The $3 trillion of assets in the trust funds represent the cumulated surpluses of their operations, with interest. However, the money has been spent or returned to taxpayers and not saved, at least not by the federal government.

From the perspective of Social Security, the trust fund does represent real claims on the rest of the government. Thus, the presence of the trust fund may prolong the life of Social Security beyond the date at which tax receipts fall short of benefits payments. However, from the perspective of future generations of workers, the trust funds do not represent incremental wealth. Even if Social Security's life is lengthened, workers 15 years from now will have to pay off the obligations in the trust fund through increases in other taxes and cuts in other government services. The trust funds themselves do not provide any assistance to future generations of workers in coping with the inadequate income of Social Security to pay the legislated benefits

-- Les Picker

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us