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Economic SYNOPSES 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 700 retirement fund, and the civil service retirement 600 500 and disability fund—trust fund assets increased 400 by approximately $216 billion in FY 2005, 300 accounting for more than 90 percent of the gap 200 between the reported deficit and the increase in 100 Change in public debt the public debt. (Other intra-governmental debt 0 Deficit holdings and technical adjustments account for –100 Deficit plus selected –200 the remainder.) trust fund accumulations* –300 The rationale for excluding trust fund accu1997 1998 1999 2000 2001 2002 2003 2004 2005 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 I Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org