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short essays and reports on the economic issues of the day
2006 ■ Number 20

Deficits, Debt, and Trust Funds
Michael R. Pakko
n its recent Mid-Session Review, the Office of
view, debt held directly by the public is a more meaningful
Management and Budget lowered its estimate of the
representation of the government’s external liabilities. As
2006 fiscal year (FY) federal deficit to $296 billion—
of July 31, debt held by the public was $4.8 trillion, repredown from the previous estimate of $423 billion. On the
senting 57 percent of the $8.4 trillion total.
other hand, looking at the change in total public debt outHowever, the trust funds exist in order to meet the
standing, the U.S. government’s overall indebtedness is
future obligations of the federal government as the babyexpected to increase by $593 billion for FY 2006 (which
boomer generation moves into retirement. In a very real
ends on September 30th). In FY 2005, the deficit was $318.6
sense, the trust fund balances do represent a debt owed to
billion although the public debt increased by $553.7 billion.
the public. From this perspective, the total outstanding debt
In ordinary parlance, a debt represents an accumulation
is a more accurate measure of government liabilities and
of deficits over time. When it comes to the federal budget,
its growth over time is a more accurate measure of new
however, the issue is more complex. The difference between
borrowing than the reported deficit.
the federal deficit and the change in total public debt is
This perspective is reinforced by considering the ultimate
primarily related to the treatment of the government’s trust
disposition of the trust fund balances. When evolving
funds. For example, in FY 2005 the Social Security trust
demographic changes require the trust funds to be drawn
fund for Old-Age and Survivors Insurance (OASI) increased
down in order to make payments to retirees, the loans will
by $163.6 billion. Although it is considered an off-budget
be called in and will need to be repaid to the trust funds
item, that revenue inflow is included as part of the governout of general revenues. This will require reducing other
ment’s unified budget, offsetting the deficits that arise from
government spending, raising taxes, or borrowing more
other programs. However, the trust fund assets are, by law,
from the public. ■
invested in nonmarketable Treasury securities that represent
additions to the total outstanding public debt.
The OASI trust fund is by far the largest of the
government trust funds. If we also include the
The Federal Deficit vs. the Change in Public Debt
next four largest—Social Security disability insurSurplus (-)/Deficit (+) ($ billions)
ance, Medicare hospital insurance, the military
retirement fund, and the civil service retirement
and disability fund—trust fund assets increased
by approximately $216 billion in FY 2005,
accounting for more than 90 percent of the gap
between the reported deficit and the increase in
Change in public debt
the public debt. (Other intra-governmental debt
holdings and technical adjustments account for
Deficit plus selected
the remainder.)
trust fund accumulations*
The rationale for excluding trust fund accu1997
mulations from the reported deficit is that the
NOTE: *Selected trust funds include OASI, Social Security Disability Insurance, Medicare insurance
Treasury securities held by the funds represent
trust fund, the military retirement fund, and the civil service retirement and disability fund.
intra-governmental debt; thus, according to this


Views expressed do not necessarily reflect official positions of the Federal Reserve System.