NCPA - National Center for Policy Analysis

The Significance of Trust Funds

May 26, 2011

The Social Security and Medicare trust funds are very important insofar as they determine the spending authority of the Social Security and Medicare programs.  Without a positive balance in their respective funds, the programs lack the authority to deliver benefits.  In both Social Security and in Medicare Hospital Insurance, the primary financing sources are the payroll taxes paid from workers and income taxes levied on Social Security benefits.  Whenever these dedicated incoming revenues fall short of payment obligations, the programs can draw on any trust fund balances to keep payments flowing, says Charles Blahous, a research fellow at the Hoover Institution.

For the most part -- but not entirely -- the balances in these trust funds reflect past program surpluses of income over expenditures.  Whenever such a past surplus was run, it was used to finance the general operations of the federal government, in exchange for which the general fund issued special-issue Treasury bonds to the trust funds, which in turn accrue interest.

  • Taken as a whole, Social Security and Medicare are thus financed in part by revenues the programs themselves annually generate (such as payroll taxes, benefit taxes and premium payments) and in part by general fund revenues (provided either as interest payments, redemption of trust fund bonds or legislated general revenue transfers).
  • All of these various sources of revenues are mixed in the trust funds, committing federal resources and establishing spending authority.
  • Unlike tax and premium contributions, however, interest payments, general revenue transfers and trust fund bond redemptions represent a draw on the general government fund for which there is no earmarked financing source.
  • They thus represent obligations of the federal government, but do not answer the important question of how those obligations will be financed.

Source: Charles Blahous, "A Primer on the Social Security and Medicare Trustees' Reports:  The Significance of the Trust Funds," Economic Policies for the 21st Century, May 23, 2011.

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