There Never Was A Surplus  

Before the terrorist attacks on the World Trade Center and the Pentagon, daily political posturing has one basic message— the Federal surplus has been lost.

            The Democrats say that George W. Bush lost the surplus with his tax cut.

The Republicans deny the charges. They say the economy has slowed but there’s still plenty of money coming into Treasury coffers. The Social Security Trust Fund, they swear, won’t be touched.

In fact, they’re all liars. There has never been a surplus.

My evidence is a simple fact: Federal debt is still rising.

This happens because our government doesn’t account for income and expenses the way you and I do. In the Burns family checkbook there is income and there are expenses. When we subtract the expenses from the income we have our “surplus”— the amount of money we have available to reduce debt. When we have a surplus for several years, debt is reduced very rapidly.

Your checkbook works the same way.

That’s not the way our government works its checkbook.

            While there has been endless talk about the size and scope of the federal surplus, the simple fact is that total federal debt has continued to expand. I pointed this out last year, observing that they took the National Debt Clock down too soon.

The table below, updated from last year, tells the story. Government debt is divided into two distinct categories. The first is debt held by government. The second is public debt, the obligations held by individual investors, institutions, and foreign governments.

In the last four years government held debt— largely comprised of assets in federal trust funds such as Social Security— has risen. Indeed, this form of debt has grown by $807 billion. During the same period, publicly held federal debt has declined by $450 billion.  As a result, total federal debt has risen by $356 billion during the purported period of surplus.

The Changing Composition of Federal Debt (all $ figures in billions)

Source: Bureau of Public Debt (Note-totals don’t reconcile due to rounding)

                One reason this has happened is that interest on federal debt held by the Social Security Trust fund and other government trust funds isn’t paid in actual cash from general revenues. If it were, publicly held debt would not have fallen so much. Instead, the Treasury simply credits the trust funds with new Treasury obligations in the amount of the earned interest.

            What does it all mean?

             Both kinds of debt represent future claims on our income, usually in the form of taxation. The only question is when those claims will be realized.

            And there’s the rub.

            Debt owed to the public is like your Visa card— it can be renewed forever if you’re willing to pay the interest. The Treasury replaces maturing Treasury bills with new Treasury bills every week, rolling existing debt into the distant future. This is the easy debt, the stuff that’s declining.

            Debt held by the government— the kind that’s growing rapidly— is another matter. It’s more like a car lease with a balloon note. The hard part is the last payment.

The employment tax was increased in 1983 so that Social Security could build a fund to cover the early waves of Baby Boomer retirements. When those retirements begin Social Security will pay out more money than it receives. Social Security will cover the shortfall by redeeming some of the I.O.U.s in the Trust Fund. They will need to issue benefit checks backed by real cash because this particular obligation can’t be deferred.

Bottom line: both parties are posturing and whatever our party affiliation, it’s your family and mine that will take the hit.

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo: Mikhail Nilov

(c) Scott Burns, 2022