Wednesday, January 19, 2005

An issue that repeatedly pops-up in the nascent debate on social security privite accounts is the trust fund.

After meeting the obligations to current social security recipients, any excess payroll taxes collected go into the trust fund.

An entity in need of capital to fund its operating expenses borrows the money with the promise to repay it at the end of the loan.

When the bonds come due, the borrowing entity remits the face value of the bond to the trust fund.

All well and good.

However, the entity borrowing the funds is the Untied States government and the operating expenses are ongoing.

As is, the US government has used the excess payroll taxes to meet its operating expenses every year and will continue to do so until the excess payroll taxes no longer exist. (2018 is the CW, but the excess payroll taxes are expected to decrease beinning in 2009.)

When the trust fund begins to receive the face value of the bonds, the USG will still need to raise money to finance the ongoing operating expenses in addition to the repayment of principal due the trust fund.

Here is the crux of part of the discussion. How does the USG government meet this demand for cash? Does it cut its operating expenses? Does it find a new lender? Does it use its taxing authority to raise the money?

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