SOCIAL SECURITY AND MEDICARE TRUST FUNDS 

AND THE FEDERAL BUDGET* 

Office of Economic Policy 

US Department of Treasury 

May 2009 

*This paper, updated annually since 2003, grew out of work of the Social Security and Medicare 

Trustees’ Working Group. Its main objective is to provide a clear description of the nature of the 

trust funds and their relationship with the federal budget. The paper serves as background for the 

Social Security and Medicare Trustees Reports. The principal authors of the original report were 

James Duggan and Christopher Soares of the Office of Economic Policy at the Department of the 

Treasury. 
CONTENTS

I. Introduction 

II. Social Security and Medicare Trust Funds

A. Social Security Trust Funds 

B. Medicare Trust Funds 

C. Trust Funds and Federal Debt 

III. Cash and Accounting Flows between Trust Funds and the Federal Budget 

A. Nature of Flows

B. Actual Flows for 2008 

IV. Future Obligations of the Trust Funds and the Budget 

A. Separate Funds 

B. Combined Funds 

C. Present Values of Revenue and Cost Components

1. 75-Year Horizon 

2. Infinite Horizon 

V. Conclusion 

1
I. Introduction 

Social Security and Medicare provide cash and in-kind benefits to over fifty million people 

each year. These social insurance programs are financed largely through payroll contributions, 

income taxes on benefits received, premiums, and federal general fund revenues that flow into 

federal trust funds for each program. The current and future financial status of the separate trust 

funds is the focus of the annual reports of the Social Security and Medicare Boards of Trustees, a 

focus necessitated by law that can be termed the “trust fund perspective.” The latest reports 

show that in the long run the trust funds will have substantial deficits due to impending 

demographic shifts and projected growth in per capita health care costs. 

By contrast, the federal government primarily uses the unified budget concept as the 

framework for budgetary analysis and presentation in the Budget of the United States 

Government. It represents a comprehensive display of all federal activities, regardless of fund 

type or budget treatment. This is a broader focus than the trust fund perspective that will be 

called here the “budget perspective” or “government-wide perspective.” 

Social Security and Medicare are among the largest expenditure categories of the U.S. 

federal budget. Together, they accounted for more than a third of all federal spending in 2008 

and the percentage is projected to rise dramatically over the coming decades for the reasons 

mentioned above. The trust fund and budget perspectives are both important and appropriate for 

their intended purposes yet the accounting differences are often misunderstood. Medicare and 

(to a much smaller extent) Social Security rely on federal general fund revenues for some of their 

financing, and they currently are credited with large interest payments as well. In the past, these 

flows were relatively small. But they have increased in recent years, and the expected rapid 

growth of the two programs renders the flows between the trust funds and the rest of the federal 

budget increasingly important features of government finance. An understanding of these flows, 

while at the most basic level just a matter of accounting, is necessary to understanding the nature 

of the programs’ funding shortfalls, and the implications of those shortfalls for the rest of the 

budget. This paper attempts to elucidate the distinctions between the trust fund and budget 

perspectives.1

 

 

1

 The U.S. Treasury Department’s 2008 Financial Report of the United States Government also describes the budget 

and trust fund relationship for Social Security and Medicare (pp. 117-121). 

2
The next section summarizes the history and purpose of trust fund accounting and briefly 

describes the nature of the Social Security and Medicare trust funds and their relationship to the 

federal debt. The third section of the paper illustrates graphically and numerically (with actual 

2008 data) the flow of funds between the trust funds and the rest of the federal budget, including 

the trust funds’ connection to overall government debt. The fourth section summarizes financial 

projections for the programs from both the trust fund and budget perspectives and the fifth 

section concludes.

II. Social Security and Medicare Trust Funds

The Social Security and Medicare trust funds were created to account for monies that are 

dedicated to the programs. The fund accounts, maintained by the Department of the Treasury, 

provide a mechanism for keeping track of all program income and disbursements. Accumulated 

assets of the funds represent automatic authority to pay program benefits (that is, no annual 

legislation is needed to spend a portion of trust fund assets on these costs). If the trust funds 

were exhausted, Congressional action would be needed to pay benefits not covered by current 

program revenues. The Medicare Supplementary Medical Insurance Trust Fund is somewhat 

different in this regard, as discussed below. 

The accumulated balances in the trust funds also give important signals to policymakers 

regarding the financial status of the funds. By estimating future balances, the magnitude of 

adjustments required by Congress to pay future benefits scheduled under current law can also be 

estimated. 

A. Social Security Trust Funds 

The federal Old-Age and Survivors Insurance (OASI) Trust Fund was established on 

January 1, 1940, as a separate account in the United States Treasury. The federal Disability 

Insurance (DI) Trust Fund, another separate account in the United States Treasury, was 

established on August 1, 1956. The OASI fund pays cash retirement benefits to eligible retirees 

and their survivors and the smaller DI fund pays cash benefits to individuals who are unable to 

work due to medical conditions. Though the events that trigger benefit payments are quite 

different, both trust funds have the same earmarked financing structure, relying almost entirely 

3
on payroll contributions and income taxes on benefits. All financial operations of the OASI and 

DI programs are handled through these respective funds. The two funds are often referred to as 

simply the combined OASDI Trust Funds. 

The primary receipts of these two funds are taxes paid by workers, their employers, and 

individuals with self-employment income, based on work covered by the OASDI program. 

Since 1990, employers and employees have each paid 6.2 percent of covered wages. The selfemployed pay 12.4 percent of covered earnings. Contributions are computed on wages and net 

earnings from self-employment up to a specified maximum annual amount ($102,000 in 2008) 

that increases each year with economy-wide wages. 

Since 1984, OASDI benefits have been subject to federal income taxation. Effective for 

taxable years beginning after 1993, the maximum percentage of benefits subject to taxation was 

increased from 50 percent to 85 percent. The revenue from income taxes on 50 percent of 

benefits is allocated to the OASDI Trust Funds and the rest is allocated to the Hospital Insurance 

(HI) Trust Fund. 

That portion of each trust fund not required to pay benefits and administration is invested, 

on a daily basis, in interest-bearing obligations of the U.S. government. The Social Security Act 

authorizes the issuance of special public-debt obligations for purchase exclusively by the trust 

funds. Although the special issues cannot be bought or sold in the open market, they are 

redeemable at any time at face value and thus bear no risk of fluctuations in principal value due 

to changes in market yield rates. Special issue investments bear interest rates determined by a 

formula which sets the rate to the average market yield on marketable interest-bearing securities 

of the federal government which are not due or callable until after four years from the date the 

rate is determined. Interest on the bonds is credited to the trust funds and becomes an asset to the 

funds and a liability to the rest of government. 

B. Medicare Trust Funds 

The Medicare program, created in 1965, also has two parts, each with its own trust fund: the 

Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) Trust Funds.2

 HI (referred 

 

2

 On the political origins of the bifurcated financing structure for Medicare see Eric Patashnik, Putting Trust in the 

US Budget, Cambridge University Press, 2000. 

4
to as Part A) pays for acute inpatient hospital services and major alternatives to hospitals (skilled 

nursing services, for example). Until 2004, SMI had one major account (referred to as Part B) 

that pays for outpatient hospital services, physician services and assorted other services and 

products. On December 8, 2003, the President signed into law the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (MMA) that, beginning in 2004, added to the SMI 

Trust Fund a second major account, referred to as Part D. Part D is a voluntary prescription drug 

benefit program.

Like OASDI, HI is financed primarily by payroll contributions. Employers and employees 

each pay 1.45 percent of all wages (no taxable earnings cap), while self-employed workers pay 

2.9 percent of all of their net earnings. Other income includes a small amount of premium 

revenue from voluntary enrollees, a portion of the federal income taxes that beneficiaries pay on 

Social Security benefits, and interest credited on the U. S. Treasury securities held in the HI 

Trust Fund. 

For Parts B and D of SMI, transfers from the general fund of the Treasury accounted for 

about 73 and 75 percent of total income in fiscal year 2008, respectively. Beneficiaries pay 

monthly premiums that currently account for about 25 percent of Part B income. In the future 

the percentages will change somewhat. Beginning in 2007 and phased in over five years, MMA 

requires Part B premiums to increase for beneficiaries with incomes above $80,000 ($160,000 

for couples), thresholds that will be indexed to inflation each year. Premiums for Part D, 

subsidized for low-income enrollees, and state transfers made up about 25 percent of total Part D 

income in fiscal year 2008. 

As with HI, interest due on the U.S. Treasury securities held in the SMI Trust Fund is 

credited to the fund, although in the case of SMI, this is quite small as the trust fund is only 

needed as a one-year contingency for Part B expenditures. Because annual appropriations for 

Part D are flexible, depending on expected expenditures, a contingency fund is not needed at all. 

C. Trust Funds and Federal Debt 

When a trust fund invests in U.S. Treasury securities, it has, in effect, loaned money to the 

rest of the government. The loan either reduces what the other government fund has to borrow 

from the public if the unified budget is in deficit or, if the budget is in surplus, reduces the 

5
amount of publicly held debt (see section III). The value of the securities held is recorded in the 

budget as “debt held by government accounts” and represents debt owed by one part of the 

government to another. Just as with marketable securities (securities sold to the public) a 

maturity date is set, interest is accrued at established rates,3

 and the securities count as part of the 

overall federal debt that is subject to a ceiling set by Congress. The interest earned on the 

internal loan is credited to the trust fund accounts in the form of additional Treasury securities. 

As such, the securities constitute a liability for the Treasury as the loan must be repaid when the 

trust funds need to redeem securities in order to make benefit payments. As with marketable 

bonds, these special Treasury securities are backed by the full faith and credit of the U.S. 

government. 

III. Cash and Accounting Flows between Trust Funds and the Rest of the Federal Budget 

This section will describe in detail the concepts that connect the trust funds to the federal 

budget and illustrate the flow of funds between the trust funds and other government accounts. 

A. Nature of Flows 

 Figure 1 shows a simplified graphical depiction of the interaction of the Social Security and 

Medicare trust funds with the rest of the federal budget. The boxes on the left show sources of 

funding, those in the middle represent the trust funds and other government accounts (of which 

the general fund is a part) into which that funding flows, and the boxes on the right show 

simplified expenditure categories. The figure is intended to illustrate how the various sources of 

program revenue flow through the budget to beneficiaries. The general approach is to group 

revenues and expenditures that are linked specifically to Social Security and/or Medicare 

 

3

 The rates on new investments do not vary by maturity. 

6
Figure 1

Social Security, Medicare, and Governmentwide Finances

SMI Trust 

Fund 

Account

Supplementary

Medical Insurance

Premiums

General 

Government 

Expenditures, 

Net Interest Income Taxes

Benefit Taxes 

Other Revenues

Borrowing from 

Public

Other 

Government 

Accounts

HI, OASDI 

Trust Fund 

Accounts

E

X

P

E

N

D

I

T

U

R

E

S

M

E

A

N

S

O

F

F

I

N

A

N

C

E

Payroll Taxes 

Hospital Insurance 

Premiums

HI, OASDI, SMI 

Benefits

Surplus 

Borrowed

Interest 

Credited

Surplus 

Borrowed

Interest 

Credited

Benefit Taxes

Other

Government

Transfers

separately from those for other federal programs. For ease of understanding, these other federal 

programs are referred to here as other government. 

As noted in section II, each of the trust funds has its own sources and types of revenue. 

With the exception of general fund transfers to SMI, each of these revenue sources is earmarked 

specifically for the respective trust fund, and cannot be used for other purposes. Much of the 

funding for the rest of government, by contrast, is not dedicated to a specific purpose.4

 For 

instance, personal income taxes go into the general fund of the Treasury and are drawn down for 

any government program for which Congress has approved spending. A rough analogy would 

be that the general fund is like a checking account, from which purchases of all sorts can be 

 

4

 A number of other programs also have dedicated revenues in the form of taxes and fees and there are a large 

number of earmarked trust funds in the federal budget. Trust fund receipts from the public account for about forty 

percent of total government receipts with the Social Security and Medicare trust funds accounting for about twothirds of those receipts. For further discussion see Federal Trust and Other Earmarked Funds, GAO-01-199SP, 

January, 2001. In the figure and the discussion that follows, we group all other programs, including other earmarked 

trust fund programs and the general fund (accounts for receipts not earmarked by law), under “Other Government 

Accounts” to simplify the description and maintain the focus on Social Security and Medicare. 

7
made, while the trust funds are like a retirement savings account, which has specific rules for 

withdrawals. From the boxes on the left the arrows represent the flow of revenues into the trust 

funds and into other government accounts. 

The Medicare SMI Trust Fund is grouped separately in the center column of Figure 1 to 

highlight the unique financing of SMI. SMI receives large transfers from the general fund of the 

Treasury. (This transfer is represented by the arrow marked General Revenue Transfers in the 

diagram.) As noted above, these funds make up roughly three-fourths of SMI program expenses. 

While the other trust funds also receive transfers from the general fund (mainly from taxes on 

benefits), in the case of SMI the size of the transfers depends on how much the program spends, 

not on how much revenue comes into the Treasury. All the non-dedicated sources of federal 

revenue contribute to the transfer: personal and corporate income taxes, custom duties, excise 

taxes, etc. If non-dedicated revenues become insufficient to cover both the mandated transfer to 

SMI and expenditures on general government programs, Treasury will have to borrow to make 

up the difference. In the long run, if transfers to SMI increase –– and as shown in the Medicare 

Trustees Report and Figure 4 below, they are projected to increase significantly in coming years 

— then Congress must borrow, raise taxes, cut other government spending, or reduce spending 

on SMI benefits. 

As described in Section II, interest is credited to the trust funds when the excess of program 

income over expenses is loaned to the general fund. The vertical lines labeled Surplus Borrowed

represent these flows from the trust funds to the other government accounts. These loans reduce 

the amount that the general fund has to borrow from the public to finance a deficit (or likewise 

increase the amount of debt paid off if there is a surplus). But the general fund has to credit 

interest on the loans from the trust fund programs, just as if it borrowed the money from the 

public. These flows are indicated in Figure 1 by the vertical arrows labeled Interest Credited. 

These interest credits increase trust fund income exactly as much as they increase interest 

transfers from the general fund (part of other government accounts). So from the standpoint of 

the federal budget as a whole, these interest credits are a wash. Of course, in the future, money 

to honor the interest credits must still be raised, through taxes, spending cuts or borrowing from 

the public. 

8
It is important to understand the additional implications of this borrowing from the trust 

funds beyond the interest credits to the trust funds. When the trust funds loan excess revenue to 

the general fund, they in turn receive additional authority to spend on benefits and other program 

expenses. (This additional authority takes the form of an increase in the assets in the trust fund 

and an increase in liability for the general fund.) The general fund, in turn, has taken on the 

obligation of repaying the principal of those loans with interest when trust fund income falls 

below expenditures—the loans will be called in and the general fund will have to reduce other 

spending, raise taxes or borrow more from the public to make the payments to the trust funds. 

B. Actual Flows for Fiscal Year 2008 

The link between the trust fund and budget perspectives can be illustrated with actual dollar 

amounts for fiscal year 2008, as shown in Table 1. The first three columns show all revenues 

and expenditures for the two social insurance programs and the fifth column shows revenues and 

expenditures for other government programs. The final column is the sum of the preceding two 

columns. Note that the sums of transfers and interest credits to the trust funds are negative 

entries under ‘Other Government’ and are thus offsetting when summed for the final column. 

These two intragovernmental transactions are key to the differences between the two 

perspectives. 

The trust fund perspective is captured in each of the three trust fund columns that contain 

data from the respective 2009 Trustees Reports. For HI, revenues from the public plus 

transfers/credits from other government accounts were $0.5 billion less than total expenditures in 

2008, as shown at the bottom of the first column. This amount was subtracted from the 

accumulated HI Trust Fund balance (not shown) and thus, ceteris paribus, the unfunded 

obligations of the program increased. At the same time, the general fund was required to pay the 

program $0.5 billion for trust fund assets that were redeemed to make up the shortfall. For SMI, 

total revenues, including $180.4 billion in non-interest transfers from other government accounts, 

exceeded total expenditures by $20.0 billion. Transfers to the SMI program from other 

government accounts are obligated under current law and therefore appropriately viewed as 

revenue from the trust fund perspective. For OASDI, total revenues exceeded total expenditures 

of $185.7 billion. In sum, from the trust fund perspective, HI, SMI and OASDI had annual 

surpluses in fiscal year 2008 totaling $205.2 billion (-$0.5 + $20.0 + $185.7). 

9
Table 1

Revenue and Expenditure 

Categories HI SMI OASDI Combined

Other 

Government Total1

 Payroll and benefit taxes $208.9 -- $689.0 $897.9 -- $897.9 

 Premiums2 4.2 $54.2 -- 58.4 -- 58.4 

 Other taxes, fees, and payments3 -- 7.0 -- 7.0 $1,560.5 1,567.5

 Total 213.2 61.3 689.0 963.4 1,560.5 2,523.9

Total expenditures to public4 230.2 224.8 617.0 1,072.1 1,906.6 2,978.7

Net Results for Budget Perspective -17.1 -163.6 71.9 -108.7 -346.1 -454.8

(Revenues from public less expenditures to public)

 Transfers 0.7 180.4 -- 181.1 -181.1 0.0

 Interest credits 15.9 3.2 113.7 132.8 -132.8 0.0

 Total 16.6 183.6 113.7 313.9 -313.9 0.0

Net Results for Trust Fund Perspective -0.5 20.0 185.7 205.2 n/a n/a

2

 Includes Part D premiums paid directly to plans, which are not displayed on Treasury statements and are estimated.

 billion, and $14,260 billion, respectively, in 2008.

 2. Totals do not necessarily equal the sums of rounded components.

 3. "n/a" indicates not applicable.

Notes: 1. For comparison, HI taxable payroll, OASDI taxable payroll, and GDP were $6,795 billion, $5,493

Source: 2009 Medicare Trustees Report, Table V.D1

3 Includes Part D State transfers.

1 This column is the sum of the preceding two columns and shows amounts for the total federal budget. The figure $454.8 

billion is the total federal budget deficit for fiscal year 2008.

Annual Revenues and Expenditures for Medicare and Social Security Trust Funds

4 The OASDI figure includes $4.0 billion transferred to the Railroad Retirement Board.

and the Total Federal Budget, Fiscal Year 2008

Revenues from other Government accounts:

Revenues from public:

(Revenues form public less expenditures to public plus 

general fund transfers plus interest)

(billions of dollars)

Trust Funds

From the government-wide (budget) perspective only earmarked revenues received from the 

public –– payroll and benefit taxes, premiums, and other taxes, fees and payments –– and 

expenditures made to the public are important for the final balance. For HI, the difference 

between such revenues ($213.2 billion) and total expenditures made to the public ($230.2 

billion) was a $17.1 billion deficit in 2008, indicating that HI increased the overall budget deficit 

in that year. For the SMI account, revenues from the public (primarily premiums) in 2008 fell 

10
short of total expenditures to the public by $163.6 billion, resulting in a net draw on the overall 

budget balance in that year. For OASDI, the difference between revenues from the public 

($689.0 billion) and total expenditures ($617.0 billion) was $71.9 billion in 2008, indicating that 

OASDI had a positive effect on the overall budget in that year. In sum, from the budget 

perspective, OASDI made a positive contribution to the budget, HI had a moderately negative 

impact, and SMI made a substantial draw on the budget. On net the three programs contributed 

$108.7 billion ($71.9 - $17.1 - $163.6, respectively) to the 2008 unified budget deficit of $454.8 

billion. 

Table 2

Social Security and Medicare Trust Funds and the Federal Debt

(billions of dollars)

HI SMI OASDI Combined

Trust Funds

Assets at the end of FY2007 $319.5 $39.1 $2,180.6 $2,539.2

 + Net results for trust funds (Table 1) -0.5 20 185.7 205.2

Assets at the end of FY2008 319.0 59.1 2,366.3 2,744.4

Federal Debt

FY 2007 debt held by public $5,035.1

 + FY2008 unified deficit (Table 1) 454.8

 + Other financing1 312.8

= FY2008 debt held by public 5,802.7

 + FY2008 debt held by trust funds 2,744.4

 + FY2008 debt held in other government accounts 1,438.7

= FY2008 gross federal debt 9,985.8

Note: Totals do not necessarily equal the sums of rounded components.

Source: Social Security and Medicare Trustees Reports

1

 Other financing includes changes in U.S. Treasury cash balances, checks outstanding, compensating balances and 

other miscellaneous items.

Table 2 illustrates the relationship between the trust funds and federal debt. Total trust fund 

assets are a component of gross federal debt. An increase in trust fund assets in 2008 of $205.2 

billion is the amount by which the trust funds added to gross federal debt. 

 

11
IV. Future Obligations of the Trust Funds and the Budget 

A. Separate Funds 

The trust fund perspective focuses on the financial status of each fund separately. This 

status is quite different for each of the funds, with varying impacts on the federal budget. For 

example, the 2009 OASDI Trustees Report projects that cash-flow deficits will begin in 2016, 

total income (including interest) will fall below expenditures in 2024, and the combined OASDI 

Trust Funds will be exhausted in 2037. From the trust fund perspective those dates are important 

as they indicate that, beginning in 2016, interest on assets (honored by the general fund) will be 

needed to pay full benefits and when the funds are exhausted in 2037 benefits can no longer be 

paid in full.5

The effect of the OASDI program on the budget occurs far sooner, however, as illustrated in 

Figure 2. As described earlier, while OASDI surpluses are rising, general fund borrowing or tax 

revenue needs are reduced relative to what would otherwise be necessary to fund a given level of 

expenditures in other government accounts. As early as 2013, however, the surpluses as a 

percent of GDP begin to decline and fall sharply thereafter, with expenditures rising above tax 

income beginning in 2016. 

Thus, in order to maintain a given level of real expenditures in other government accounts, 

non-dedicated taxes (like the income tax) would have to be raised, or borrowing from the public 

increased, to make up for the reduction in the OASDI Trust Funds’ cash-flow surpluses. 

This effect on the budget will increase rapidly. The retirement of the baby boom generation 

causes the OASDI expenditure/GDP ratio (solid line in Figure 2) to increase by over 1.2 

percentage points over the first 20 years of the projection period (i.e., expenditures are growing 

significantly faster than GDP) while the income ratio is falling. OASDI surpluses contribute 

positively to the unified budget until 2016 but at a rapidly declining rate after 2012. And 

beginning in 2016, the negative balances will add to a unified budget deficit (or reduce a surplus) 

at a rapidly increasing rate. 

 

5

 OASDI Trust Fund asset redemptions are projected to begin in 2024. 

12
Figure 2

OASDI Tax Income and Expenditures, 2009-2085

(percent of GDP)

3

4

5

6

7

8

9

10

2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2061 2065 2069 2073 2077 2081 2085

Year

Percent

OASDI Tax 

2016: Cash flow

turns negative

2037: Trust funds exhausted

OASDI Expenditures

Budget Perspective

 Annual Balance = Tax Income - Expenditures

 Positive through 2015, negative thereafter

Trust Fund Perspective

 Annual Balance = Tax Income + Interest - Expenditures

 Positive through 2023, negative thereafter

 Trust funds exhausted in 2037

Cash deficit covered by interest

paid from general fund and 

redemption of trust fund assets 

 The picture is similar for the HI Trust Fund although, as seen in Figure 3, cash flows are 

projected to be negative in 2009 and thereafter and the HI Trust Fund will be exhausted in 2017. 

Figure 3 illustrates that, while the income ratio is relatively flat, the expenditure ratio rises 

throughout the projection period. From the trust fund perspective, full benefits can be paid for 

another eight years. From a unified budget perspective the HI cash deficits will have a rapidly 

growing negative effect. 

The distinction between trust fund and budget perspectives is most pronounced in the case 

of SMI (Figure 4). As described earlier, the portion of SMI expenditures financed by general 

revenues is adjusted each year to make up for the difference between premium income (also 

adjusted every year) and total expenditures—as expenditures grow, so does the general revenue 

transfer. From the perspective of the trust fund, SMI is always “fully funded” (that is, the trust 

fund will never run out, as long as there is money in the Treasury to cover expenditures), 

whereas, from the perspective of the budget, SMI draws significant transfers that will continue to 

grow with the growth in Medicare expenditures. 

13
Figure 3

HI Tax and Premium Income and Expenditures, 2009-2083

(percent of GDP)

0

1

2

3

4

5

6

2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2061 2065 2069 2073 2077 2081

Year

Percent

Budget Perspective

 Annual Balance = Tax Income + Premiums - Expenditures

 Negative 2009 and thereafter

HI Expenditures

HI Tax and Premium Income

2017: Trust fund exhausted

Cash deficit covered by interest paid from general fund 

and redemption of trust fund assets

Trust Fund Perspective

 Annual Balance = Tax Income + Premiums + Interest (not shown) - Expenditures

 Negative 2009 and thereafter

Figure 4

SMI Income and Expenditures, 2009-2083

(percent of GDP)

0

1

2

3

4

5

6

7

2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2061 2065 2069 2073 2077 2081

Year

Percent

Total Expenditures

State Transfers

General Revenue Transfers

 Part B+Part D

Budget Perspective

 Annual Balance = Premiums + State Transfers - Expenditures

 = General Revenues

Premiums

Trust Fund Perspective

 Annual Balance = Premiums + State Transfers

 + General Revenues - Expenditures

 = 0

14
B. Combined Funds 

The budget perspective can also show the net effect of the combined trust funds on the 

unified budget. As described in section III, what matters for the unified budget is the difference 

between income received from the public and expenditures paid to the public. Figure 5 brings 

together those differences (relative to full scheduled benefits) for all three funds as they are 

projected to develop over the next seventy-five years. The figure shows projected shortfalls (tax 

income less expenditures, shown as positive numbers) for OASDI and HI as well as general 

revenue transfers to SMI for the period 2009-2083, each as a percent of GDP. The GDP scale 

provides an indication of the capacity of the national economy to sustain the three programs. 

The ‘Total’ line shows that the sum of the three components is projected to exceed 9 percent of 

GDP by 2083. 

Figure 5

OASDI and HI Shortfalls and General Revenue Transfers

to Part B and Part D, 2009-2083

(percent of GDP)

-2

0

2

4

6

8

10

12

2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2061 2065 2069 2073 2077 2081

Year

Percent

OASDI Shortfalls

HI Shortfalls

General Revenue Transfers

 Total Shortfalls plus

General Revenue Transfers

 Clearly, the pressure on the general fund to honor scheduled Social Security and Medicare 

benefits will grow dramatically and rapidly. Over the next twenty-five years total shortfalls plus 

general revenue transfers are projected to grow nearly five percentage points of GDP. In order to 

pay for these scheduled costs either taxes will have to increase sharply, other government 

15
programs will have to be cut to a fraction of their current levels, or increased borrowing will 

have to take place. Note that from the budget perspective the combined funds already have a net 

draw on the unified budget. 

C. Present Values of Revenue and Cost Components 

1. 75-Year Horizon. Table 3 shows discounted present values of the 75-year financial 

projections discussed above. Present values recognize that a dollar next year is worth less than a 

dollar today, because a dollar today could be saved and earn a year’s-worth of interest. To create 

a present value, future amounts are thus reduced using an assumed interest rate, and those 

reduced amounts are summed. The resulting present value is the amount that would have to be 

put in the bank today at the assumed interest rate to fund the future cash flows. 

For HI, scheduled revenues over 75 years from payroll and benefit taxes are estimated to be 

$12.0 trillion in present value and scheduled expenditures to the public (primarily benefit 

payments) amount to $25.8 trillion.6 From a budget perspective, the net unfunded obligation is 

$13.8 trillion in present value. From the trust fund perspective, the existing trust fund is added to 

give net obligations of $13.4 trillion in present value. 

For SMI, revenues from the public are projected to be $8.2 trillion and expenditures to the 

public $32.5 trillion in present value. From the budget perspective, the unfunded obligation is 

$24.3 trillion in present value. From the trust fund perspective, the $24.3 trillion is a statutory 

revenue source that leaves the trust fund with a de minimis unfunded obligation. 

For OASDI, over the next seventy-five years revenues from payroll and benefit taxes are 

estimated at $37.2 trillion in present value and expenditures to the public at $44.9 trillion in 

present value, resulting in net obligations of $7.7 trillion. From the trust fund perspective, the 

net obligation is reduced by the $2.4 trillion trust fund for an unfunded obligation of $5.3 trillion. 

 Table 3 shows that, for the three programs combined, scheduled revenues from the public 

less scheduled expenditures to the public amounts to -$45.8 trillion in present value.7

 From the 

 

6

 When referring to unfunded obligations for HI and OASDI, it is important to recognize that there is no provision 

under current law to address the projected financial deficits, and thus pay full benefits, once trust fund assets are 

depleted (2017 for HI and 2037 for OASDI). For this reason we refer to “scheduled” receipts and costs. 7

 To put the size of this shortfall in perspective, $45.8 trillion is equivalent to about 5.8 percent of the present value 

of GDP over the same 75-year period, or over three times the size of the entire U.S. economy in 2008. 

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budget perspective this is the amount of additional resources, beyond the $57.4 trillion in payroll 

and benefit taxes and premiums from the public, that would be needed to pay all scheduled costs 

over 75 years. From a trust fund perspective, the value of existing trust fund assets for OASDI 

and HI ($2.7 trillion) and the value of the general revenue transfer for SMI ($24.2 trillion) are 

viewed as assets of or income to the programs. From the trust fund perspective, the picture is 

only modestly different from the budget perspective for OASDI and HI when the existing trust 

fund assets are accounted for but markedly different for SMI. For the latter, general revenue 

transfers are a dedicated source of income that ensures the program is in continuous financial 

balance. 

HI SMI OASDI Combined

Revenues from public:

 Payroll and benefit taxes $12.0 -- $37.2 $49.2

 Premiums 0.0 $7.2 -- 7.2

 Other taxes and fees1 -- 1.0 -- 1.0

 Total 12.0 8.2 37.2 57.4

Total expenditures to public 25.8 32.5 44.9 103.2

Net Results for Budget Perspective -13.8 -24.3 -7.7 -45.8

(Revenues from public less expenditures to public)

Transfers from general fund 0.0 24.2 0.0 24.2

Trust fund assets on January 1, 2009 0.3 0.0 2.4 2.7

Net Results for Trust Fund Perspective -13.4 -0.1 -5.3 -18.8

1 Includes Part D state transfers.

Notes: 1. "0.0" indicates an amount of less than $50 billion.

 2. Totals do not necessarily equal the sums of rounded components.

Table 3

Present Values of Revenue and Cost Components of 

75-year Open Group Obligations

HI, SMI, and OASDI

Source: 2009 Medicare Trustees Report, Table V.D2

(trillions of dollars, as of January 1, 2009)

(Revenues form public less expenditures to public plus general 

fund transfers plus trust fund assets)

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2. Infinite Horizon. The 75-year horizon represented in Table 3 is consistent with the 

predominant focus of the Social Security and Medicare Trustees Reports. Yet, a 75-year 

projection is incomplete. For example, when calculating unfunded obligations, a 75-year 

horizon includes revenue from some future workers but only a fraction of their future scheduled 

benefits. Therefore, the Trustees Reports also provide an additional perspective that provides 

estimates of net obligations over the infinite horizon. The estimates are shown in Table 4 for the 

three major programs represented in Table 3. Note that only the net obligations (income less 

expenditures) are shown as the separate revenue and cost components are not available. 

 HI SMI OASDI Total

Net Results for Budget Perspective

Revenues from public less expenditures to public 

through the infinite future -$36.8 -$52.5 -$17.5 -$106.8

Net Results for Trust Fund Perspective

Transfers from general fund 0.0 52.5 0.0 52.5

Trust fund on 1/1/2009 0.3 0.0 2.4 2.7

Revenues from public less expenditures to public 

plus general fund transfers plus trust fund assets -36.4 0.0 -15.1 -51.5

Note: Totals do not necessarily equal the sums of rounded components.

Source: Social Security and Medicare Trustees Reports

Table 4

Present Values of Income less Expenditures

through the Infinite Horizon for HI, SMI, and OASDI

(trillions of dollars, as of January 1, 2009)

From the budget perspective, the first line of Table 4 represents the value of resources 

needed to finance each of the programs into the infinite future. The total resources needed for all 

the programs sums to $106.8 trillion in present value terms. This need can be satisfied only 

through increased borrowing, higher taxes, reduced program spending, or some combination 

thereof. 

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The second line shows the present value of general revenue transfers to the SMI program 

(Part B + Part D) as of January 1, 2009 and is equal (but opposite in sign) to the gap between 

premium income and expenditures shown in the first line. From the trust fund perspective, 

because general revenues are a source of income to the SMI program, there is no funding gap. 

The third line shows the value of the trust funds at the beginning of 2009. For the HI and 

OASDI programs this represents, from the trust fund perspective, the extent to which the 

programs are prefunded. From that perspective, when the trust fund is subtracted, an additional 

$36.4 trillion and $15.1 trillion, respectively, are needed to sustain the two programs into the 

infinite future. 

In comparison to the analogous 75-year number in Table 3, extending the calculations 

beyond 2083 captures the full lifetime benefits and taxes and premiums of all past, current, and 

future participants. The shorter horizon understates financial needs by capturing relatively more 

of the revenues from current and future workers and not capturing all of the benefits that are 

scheduled to be paid to them. 

V. Conclusion

 The trust fund perspective relates to an evaluation of the financial status of each individual 

trust fund, that is, a determination of whether the fund has sufficient revenues and assets to pay 

promised benefits and administrative expenses. Trust fund assets provide the statutory authority 

to make such payments without the need for an appropriation from Congress. In the case of 

OASDI, for example, the 2009 Trustees Report projects that this authority would allow full 

benefit payments until 2037. 

 The budget or government-wide perspective is a comprehensive presentation of all federal 

financial activities, of which Social Security and Medicare are crucial components. Financial 

flows between the public and the federal government are what matters, as flows between 

accounts within the budget cancel out in the final balance. Trust funds are merely accounting 

devices from this perspective. The budget evaluates the relationship between dedicated revenues 

(payroll and benefit taxes and premiums) from the public and the benefits promised to the public 

under current Social Security and Medicare program rules. In the case of OASDI, for example, 

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dedicated revenues fall short of benefit expenditures beginning in 2016 and the difference 

between those revenues and expenditures begins to decline in 2013. 

 Both perspectives highlight concerns over impending demographic changes and continued 

rapid growth in health care costs that will place increasing stress on finances for the Social 

Security and Medicare programs. But it is important to recognize that the signals of financial 

stress that emanate from a trust fund analysis are substantially milder than those faced by the 

federal budget as a whole. The difference between the two perspectives is most dramatic in the 

case of the SMI program.