Making Trust Funds Solvent Would Just About Stabilize Debt

The Congressional Budget Office's (CBO) long-term outlook shows a bleak picture, with federal debt steadily rising from 75 percent of Gross Domestic Product (GDP) in 2016 to 141 percent by 2046. But it is important to note that this rising trajectory of debt assumes that lawmakers will avert the major trust funds' insolvency by transferring general revenue to each trust fund as necessary. Long-term debt would look much better if they instead brought trust fund spending in line with revenue, though of course it would require tough choices to do so.

Several major trust funds are projected to be insolvent within the next 15 years. The closest insolvency dates are for the Highway Trust Fund and the Social Security Disability Insurance (SSDI) trust fund, set to be exhausted in Fiscal Year (FY) 2021 and FY 2022, respectively; their insolvency dates were pushed back in legislation last year that transferred funds largely without real offsets. These trust funds will be facing deficits of about 0.1 to 0.2 percent of GDP when they run out. Next up is the Hospital Insurance trust fund, which finances Part A of Medicare and is expected to be exhausted in 2026, when it will face a 0.2 percent of GDP annual deficit that would likely grow over time. Finally, there is the largest trust fund, the Social Security Old-Age and Survivors' Insurance (OASI) trust fund, which is set to be exhausted in 2030 and faces a projected annual deficit of 1.5 percent of GDP at that time.

^{Source: Congressional Budget Office and CRFB calculations}

CBO already provides the budgetary and economic effect of limiting spending from the combined Social Security trust fund to incoming revenue starting at its exhaustion date of 2029. It shows that debt would be on a much more modest upward path and 40 percentage points lower in 2046: 101 percent of GDP instead of 141 percent.

If we also limit spending to revenue at the exhaustion dates for the other trust funds, debt would look much better. Under this "TRUSTGO" scenario, we estimate debt would be on a similar upward path as current law through 2030 but then stabilize at under 90 percent of GDP and fall to 78 percent by 2046. If lawmakers proactively reformed these programs in advance of their insolvency dates, savings could be somewhat less backloaded and therefore debt over the 30-year period would likely rise and fall more slowly. As a result, making trust funds solvent would just about stabilize debt at its current level 30 years from now.

As hinted at above, the lower debt under the TRUSTGO scenario would result in higher economic growth. CBO estimates that limiting Social Security benefits to revenue in 2029 and beyond would increase real GNP per person by 3 percent, or $2,000, in 2046. Based on this, we estimate that limiting spending from all four trust funds to revenue at their exhaustion dates would increase real GNP per person by over 4 percent, or $3,000, in that year. These estimates don’t account for the particular policies chosen. For example, if Social Security’s and Medicare’s finances were improved in part by raising their various ages, CBO has estimated in the past that it would increase the size of the economy by another 3 percent after 50 years.

Clearly, making trust funds solvent would much improve the debt situation and halt its long-term upward path. Of course, actually doing so would require making choices that lawmakers have been unwilling to make so far (or have actively put off in the case of the Highway and Disability Insurance trust funds). It would mean reducing spending or increasing revenue for highways, SSDI, Medicare, and old-age Social Security. Lawmakers can greatly improve the long-term budget outlook by making trust funds whole, but they must consider the policies that must be undertaken to ensure that.