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Commentary and opinion on current civic, political, and religious events and issues.

Past Issue
9 October 2000

Northern City Journal
(ISSN 1528-9575)
Vol. 1, No. 39

Minneapolis, Minnesota

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Privatize All the Federal Trust Funds Now

by Jerome F. Winzig

In a private trust fund, one person -- a trustee -- manages the trust's assets for the benefit of another person -- the beneficiary. The trustee is usually charged with investing the assets in a productive manner to earn income for the beneficiary, and the beneficiary owns both the assets and the earnings. The trustee is obligated to follow the trust's requirements and cannot change those requirements without the beneficiary's approval.

This is not true of the many trust funds of the federal government, which have a total value of $1.9 trillion. In fact, the very use of the term "trust fund" is highly misleading since the federal government owns the assets and earnings. It can raise or lower future trust fund collections and payments simply by changing existing law. It can even change a fund's purpose!

The newly-released bi-partisan report by the National Academy of Social Insurance says, "federal trust funds are often mistakenly perceived as reservoirs of financial assets." This report goes on to quote a 1998 study that points out federal trust funds are actually "record-keeping devices that account for the spending authority available for certain programs."

In other words, the $1.9 trillion in the federal trust funds isn't in the bank. It isn't invested anywhere. Those trillions are just a massive IOU -- a promise that the federal government will pay back that money out of future new taxes. In the meantime, the federal government has spent all of that money on other programs!

If a private trust fund operated in this fashion, its trustees would be hauled into court, fined, and sent to prison. The federal government, however, is not subject to the same audit and accountability rules that apply to private trusts. Members of Congress talk about the trust funds as if they were real dollars in the bank, instead of the future promise of the federal government. But if they are just future promises, why bother with the trust funds? Because they allow Congress to use trust fund receipts for other purposes.

The dollar amounts are staggering. Fifty-four of these trusts have assets of $300 million or more. The largest are the Social Security Funds ($855 billion), the Federal Civilian Employees Retirement Funds ($492 billion), the Medicare Funds ($184 billion, the Military Retirement Fund ($152 billion), the Unemployment Trust Fund ($77.7 billion), and the Highway Trust Fund ($29 billion). Also included are the trust funds of the Bureau of Indian Affairs, which -- according to a 1999 audit by Arthur Andersen -- could not account for $2.4 billion in transactions.

The problem is huge, but it's possible to start fixing it right now by privatizing all of the federal trust funds immediately. Last year, the federal government collected $148 billion in receipts for the trust funds. If the trust funds were privatized, this money could be invested in real investments. In ten years, according to current budgetary forecasts, the principal alone could exceed $2 trillion. It would be tempting for Congress to politicize the investment decisions of funds of this size, so there would have to be some way to clearly define the trustees' fiduciary responsibilities.

However, both political parties would oppose privatization with all their might, for three compelling but politically-crass reasons.

First, privatizing the trust funds would force Congress to face the fact that the existing $1.9 trillion "balance" in the trust funds exists only on paper; there would be no money to transfer into those private funds. The only thing Congress could do would be to admit the truth and declare all the funds bankrupt. But this would expose the massive deception that members of Congress from both parties have perpetrated on the American public for decades. (The news media would oppose this solution as well, for it would also expose them as either ignorant of the issue or intentional participants in the fraud.)

Second, Congress might have to raise taxes to make up the funds that it has siphoned from the funds over many years. (This would only make sense if the new taxes really go into private investments; otherwise the problem would just repeat itself.) Raising taxes might be necessary if privatizing the trust funds didn't increase their returns enough to make up the huge losses of the past. But if Congress does nothing and fails to privatize the trust funds, then in a few years -- when it first becomes necessary to draw down against the non-existent money in the trust funds -- it will have no choice but to raise taxes or lower benefits.

Third, privatizing the trust funds would virtually eliminate the surplus that both parties boast about, because almost all of the surplus comes from trust fund revenues. According to White House figures, $148 billion of fiscal year 2000's $167 billion surplus comes from the trust funds. An unhappy Congress would be forced to quit stealing from trust funds for current programs.

These political reasons for Congress to oppose privatization are also excellent reasons for the American people to support it. It makes excellent fiscal sense.

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