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Why do economists disagree about the impact of trust funds on the national debt?

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kristenmarieb... | Student, Grade 10 | Valedictorian

Posted June 25, 2013 at 2:37 AM via web

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Why do economists disagree about the impact of trust funds on the national debt?

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kipling2448 | (Level 2) Educator Emeritus

Posted June 25, 2013 at 3:12 AM (Answer #1)

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Economists are notorious for rarely agreeing on anything, including how often they agree to disagree.  That they should disagree regarding the impact of the Social Security and Medicare trust funds, then, is not surprising.  The national debt is so large, and the burden of providing for an aging Baby Boomer population so immense, that the numbers are difficult for many people to comprehend.  According to some economists, in the case of both Social Security and Medicare, an aging population supported by fewer taxpayers, occurring concurrently with the astronomical rise in the national debt, is a recipe for financial disaster.  That those two trust funds account for two-thirds of the total of the federal government's trust fund balances (according to a recent report by the Congressional Budget Office) is an indication of the importance of those funds in calculations of future expenditures, although the Social Security impact dwarfs that of Medicare.  Either tax rates have to rise across the board, or benefits have to decrease.  

What makes the issue so complicated is understanding the intricacies of the federal budget and the federal debt.  Whereas the anticipated burden of caring for a large population of elderly is considered a given, the impact of the trust funds is less certain.  According to the U.S. Government Accountability Office, Congress' investigative arm,

debt held by the public essentially represents the amount the federal government has borrowed to finance cumulative cash deficits.  Debt held by the public represents a burden on today's economy as borrowing from the public absorbs resources available for private investment and may put upward pressure on interest rates...Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that been invested in Treasury securities...Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account...Debt held by the trust funds, such as Social Security and Medicare, is not equal to the future benefit costs implied by the current design of the programs and, therefore, does not fully capture the government's total future commitment to these programs.

That's a lengthy quote from a government document, but it summarizes the situation well, and provides some insight into the complexity of the federal budget.  Debt held by the trust funds is "an asset to those accounts but a liability to the Treasury; they offset each other in the consolidated financial statements."  So, determining the impact of the trust funds on the national debt is subject to wide variations.  Economists disagree because they have different perspectives on how Social Security in particular will be affected both by demographics and by calculations of the current national deficit.  If the trust fund represents money that is needed to provide benefits to the burgeoning community of retirees, then how it is handled is of paramount importance to decisionmakers in Washinton, D.C.

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