The 'Trust Fund' Tolls For Thee

Here's a description of the Social Security and Medicare trust funds on the Social Security website, in the 'SUMMARY OF THE 2014 ANNUAL REPORTS'  from the Social Security and Medicare Board of Trustees.  Pay special attention to the second paragraph, and recall that any investment in U.S. Government securities puts money in the U.S. Government's general fund to be spent — that is, both the principle and interest payments for U.S. Government securities (whether marketable or not), are made from the earnings of U.S. taxpayers --

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http://www.ssa.gov/oact/trsum/
https://www.ssa.gov/oact/TR/2014/index.html

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What Are the Trust Funds?  Congress established trust funds managed by the Secretary of the Treasury to account for Social Security and Medicare income and disbursements.  The Treasury credits Social Security and Medicare taxes, premiums, and other income to the funds.  There are four separate trust funds.  For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits and the DI Trust Fund pays disability benefits.  (OASDI is the designation for the two trust funds when they are considered on a theoretical combined basis.)  For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care.  The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts: Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit.  In 2013, 47.0 million people received OASI benefits, 11.0 million received DI benefits, and 52.3 million were covered under Medicare.

The only disbursements permitted from the funds are benefit payments and administrative costs.  Federal law requires that all excess funds be invested in interest-bearing securities backed by the full faith and credit of the United States.  The Department of the Treasury currently invests all program revenues in special non-marketable securities of the U.S. Government which earn a market rate of interest.  The balances in the trust funds, which represent the accumulated value, including interest, of all prior program annual surpluses and deficits, provide automatic authority to pay benefits.
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Now notice these paragraphs from the same page, and especially the statement that deficits in these programs contribute to U.S. Federal budget deficits, and that the redemption of trust fund bonds provides no new net income to the Treasury --

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http://www.ssa.gov/oact/trsum/
https://www.ssa.gov/oact/TR/2014/index.html

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What are the Budgetary Implications of Rising Social Security and Medicare Costs?  Concern about the long-range financial outlook for Medicare and Social Security often focuses on the depletion dates for the HI and OASDI trust funds—the times when the projected trust fund balances under current law will be insufficient to pay the full amounts of scheduled benefits.  A more immediate issue is the effect the programs have on the unified Federal budget prior to depletion of the trust funds.

Chart D shows the excess of scheduled costs over dedicated tax and premium income for the OASDI, HI, and SMI trust funds expressed as percentages of GDP.  Each of these trust funds’ operations will contribute increasing amounts to Federal unified budget deficits in future years.  General revenues pay for roughly 75 percent of all SMI costs.  Until 2030, interest earnings and asset redemptions, financed from general revenues, will cover the shortfall of HI tax and premium revenues relative to expenditures.  In addition, general revenues must cover similar payments as a result of growing OASDI deficits through 2033.

In 2014, the projected difference between Social Security’s expenditures and dedicated tax income is $80 billion.  For HI, the projected difference between expenditures and dedicated tax and premium income is $25 billion.  The projected general revenue demands of SMI are $248 billion.  Thus, the total General Fund requirements for Social Security and Medicare in 2014 are $352 billion, or 2.0 percent of GDP.  Redemption of trust fund bonds, interest paid on those bonds, and transfers from the General Fund provide no new net income to the Treasury, which must finance these payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

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The last sentence in the quote above deserves to be repeated, since so many people wish to pretend that the Social Security and Medicare 'trust funds' hold assets that are helpful to taxpayers, rather than simply a claim on their wages —

Redemption of trust fund bonds, interest paid on those bonds, and transfers from the General Fund provide no new net income to the Treasury, which must finance these payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

This is probably the clearest statement that will ever come from the government that the bonds in the trust funds do not represent an asset to taxpayers.  As stated above, if the redemption of trust fund bonds is expected to generate any funds to be spent (as one would expect), the only way to finance that spending is through increased taxation or additional borrowing.

Without additional taxation or borrowing, the dollar amounts of the bonds in the trust funds cannot be spent — so the only way to prevent the trust fund bonds from triggering new taxation or borrowing is to throw them away (i.e. not redeem them).

In short, the trust fund bonds simply act as an accounting tool — a way to track the debt owed by U.S. taxpayers, that they must pay in order for future recipients of Social Security and Medicare to actually receive meaningful benefit payments.

If you are a U.S. taxpayer, the U.S. government trust funds do not make payments to you — you make payments to them.