Some of our most important federal programs are financed through dedicated revenue sources and managed through federal trust funds. Over the next decade, these trust funds face a combined $3.2 trillion shortfall.
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Once a trust fund is insolvent, its program can only spend as much as comes in through dedicated taxes in that year. This could mean immediate cuts in benefits or require immediate tax increases to continue paying full benefits.
What is a federal trust fund?
A federal trust fund is an accounting mechanism the government uses to ensure certain types of tax revenue are dedicated to specific spending programs.
For example, when the government takes Social Security taxes out of your paycheck, it credits the money to the Social Security Trust Fund. The same thing happens with your Medicare Hospital Insurance tax. The federal gas tax you pay at the pump gets credited to the Highway Trust Fund.
The trust funds contain what are basically IOUs – an accounting on paper of the taxes credited to them. Meanwhile, the tax money itself flows into the US Treasury, where it is used to pay current benefits or to help pay for other government spending.
When Social Security needs to pay benefits, or Medicare pays hospital bills, the programs turn in their IOUs to the treasury while the treasury pays the bills.
Over time, if the tax revenue doesn’t keep up with required payments, the programs will draw down their IOUs. When they run out, the trust funds are said to be “insolvent.”
Once a trust fund is insolvent, its program can only spend as much as comes in through dedicated taxes in that year. This could mean immediate cuts in benefits or require immediate tax increases to continue paying full benefits.
What is a federal trust fund?
A federal trust fund is an accounting mechanism the government uses to ensure certain types of tax revenue are dedicated to specific spending programs.
For example, when the government takes Social Security taxes out of your paycheck, it credits the money to the Social Security Trust Fund. The same thing happens with your Medicare Hospital Insurance tax. The federal gas tax you pay at the pump gets credited to the Highway Trust Fund.
The trust funds contain what are basically IOUs – an accounting on paper of the taxes credited to them. Meanwhile, the tax money itself flows into the US Treasury, where it is used to pay current benefits or to help pay for other government spending.
When Social Security needs to pay benefits, or Medicare pays hospital bills, the programs turn in their IOUs to the treasury while the treasury pays the bills.
Over time, if the tax revenue doesn’t keep up with required payments, the programs will draw down their IOUs. When they run out, the trust funds are said to be “insolvent.”
Once a trust fund is insolvent, its program can only spend as much as comes in through dedicated taxes in that year. This could mean immediate cuts in benefits or require immediate tax increases to continue paying full benefits.
The Benefits of Fixing our Trust Funds
Stronger economic growth
Fixing trust fund financing can increase economic output by improving economic certainty and reducing the drag of federal debt. Some fixes are themselves helpful in supporting a larger economy.
A main goal of social insurance programs is to protect the most vulnerable segments of the population from unexpected economic shocks. The threat of insolvency puts this goal in jeopardy, placing large and abrupt spending cuts on the horizon.
Improved federal programs
Plans to extend program solvency can be used to implement forward-looking reforms in the key areas of retirement security, health care and infrastructure to make the programs more effective and efficient.
Get Into the Weeds
The Case for Trust Fund Solutions
Major trust funds financing Social Security, Medicare, and highways are projected to be insolvent in the coming years. Inaction would lead to large across-the-board cuts. Trust fund solutions can secure and improve these programs, strengthen the nation’s fiscal outlook, and promote faster economic growth.
This fund finances inpatient hospital coverage for seniors and some workers with disabilities. Its revenue comes primarily from a payroll tax on workers and employers.
This fund finances monthly retirement benefits for workers and their survivors. Its revenue comes primarily from a payroll tax on workers and employers.
We need lawmakers to fix our trust funds before the well-being of seniors, the economy, and future generations is in jeopardy. Find your representative to make your voice heard.