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Has the Unified Budget Undermined the Federal Government Trust Funds?

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  • Sita Nataraj
  • John B. Shoven

Abstract

In order to ease the burden on workers during the retirement of the baby boom generation, the 1983 Social Security Reforms set payroll taxes above the level needed to pay current benefits, thus partially prefunding the baby boomers' retirement. The military and civil service retirement programs followed suit in the mid-1980s and switched from pay-as-you-go financing to funded systems. The excess income generated by these retirement programs was held in the federal trust funds, which have accumulated almost $3 trillion since the reforms took place. However, this paper presents evidence that the trust fund build-up may not help future generations due to the adoption of the Unified Budget in 1970. The Unified Budget includes trust fund receipts as income and trust fund payments as expenditures. The empirical evidence suggests that attempts to balance the Unified Budget while the trust funds were generating surpluses has led to increased government spending and personal and corporation income tax cuts within the rest of the federal government. There is no evidence of increased government saving as a result of the trust fund accumulations. An alternate theory of increased national saving is also explored, where increased payroll taxes accompanied by decreased income taxes induces higher personal saving. This mechanism, suggested by Diamond, also does not appear to have significantly enhanced the wealth of future generations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10953.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:10953

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  1. Bosworth, Barry & Burtless, Gary, 2004. "Pension Reform and Saving," National Tax Journal, National Tax Association, vol. 57(3), pages 703-27, September.
  2. Kent Smetters, 2003. "Is the Social Security Trust Fund Worth Anything?," NBER Working Papers 9845, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security's Financial Problems," NBER Working Papers 11060, National Bureau of Economic Research, Inc.
  2. Marcelin Joanis & Claude Montmarquette, 2005. "La problématique de la dette publique au Québec : causes, conséquences, solutions," CIRANO Burgundy Reports 2005rb-06, CIRANO.
  3. Sylvester J. Schieber, 2010. "Aging Populations, Pension Operations, Potential Economic Disappointment and Its Allocation," NBER Chapters, in: Demography and the Economy, pages 293-325 National Bureau of Economic Research, Inc.

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