Off Budget and How Congress Borrows Against It

Raiders of the Social Security Trust Fund

Sign showing not borrowing from social security trust fund
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Off-budget is the revenue and spending of certain federal entities that Congress wants to protect from the normal budget process. Off-budget government spending is excluded from budget caps, sequestration, and pay-as-you-go requirements.

The two federal entities that are off-budget are the Social Security Trust Fund and the U.S. Postal Service. Some other federal entities perhaps should be included as off-budget expenditures because they are quasi-governmental entities.

Federal Unified Budget

The federal unified budget includes both off-budget and on-budget revenue and spending. It's the budget used to report each year's budget deficit. But the U.S. debt increases by the deficit of on-budget items only.

For an example of how the off-budget total is recorded, take a look at the FY 2016 budget. The widely-reported deficit was $585 billion. But the addition to the debt was $1.423 trillion. Other examples appear when you compare deficit by year to debt by year.

Off-Budget Social Security

The Social Security Trust Fund consists of two funds, the Old-Age and Survivors Insurance, and the Disability Insurance Trust Funds. These funds invest the proceeds from payroll taxes that provide income for Social Security benefits. 

In 1983, these funds began accumulating large surpluses. Many more workers were paying into the funds than retirees taking out benefits. Until 2010, the taxes more than covered expenses.

Government Investing of Payroll Taxes

Congress requires the U.S. Treasury to invest the payroll tax income in "securities guaranteed as to both principal and interest by the federal government." The Treasury issues these special interest securities as it does U.S. Treasury bonds. However, there are three differences in these special-issued securities.

  1. They are not tradeable
  2. Are only available to the trust funds
  3. Only bought with payroll taxes.

Creating a Social Security Lock-Box

After creating the bonds, the Treasury sends the payroll taxes into the general fund. These general fund sums are not supposed to be used to finance tax cuts or spending increases. Otherwise, there would be nothing left to fund Social Security benefits when retirees need it. When the Treasury needs to pay Social Security benefits, it uses the general funds to redeem the special-issue bonds, with interest.

Raiders of the Trust Fund

However, calling the revenue off-budget didn't protect it. Instead, Congress worked with two budgets. It planned its spending using the unified budget, which included the off-budget revenue from Social Security revenue. In this way, it "borrowed" Social Security Trust Funds when planning for the budget's spending. The borrowed funds made the federal budget deficit look smaller. The real amount owed still shows up in the debt. It explains why a listing of the U.S. debt by each president is larger than what appears on a listing of the  U.S. deficit by each president.

Off-Budget Postal Service

The United States Postal Service (USPS) became another quasi-government entity in 1970. It tries to compete with super-competitive FedEx, UPS, and other shippers to meet individual and business packaging and shipping needs.

Congress requires the USPS to be revenue-neutral—provide money for its operations through its revenue-making functions. Such revenue-generating functions include selling stamps, processing special delivery packages, and other such duties. The USPS is supposed to fund all its operations from its revenue, like a business. For this reason, President Nixon moved it off-budget in 1974.

However, Congress uses the unified budget to set policy for the USPS. It requires the agency to fully fund the pension for its workers. It must also pay for any military service by its employees. The funds that are set aside are off-budget, but, like the Social Security Trust Funds, they are included in the unified budget. It's another reason why the deficit is smaller than the addition to the debt. 

Non-Budget Quasi-Government Entities

Fannie Mae, Freddie Mac, and the Federal Reserve are quasi-governmental entities who are not included in the unified budget.

Fannie and Freddie were bailed out by the U.S. Treasury Department in 2008. It took over the quasi-governmental agencies to prevent their bankruptcy. Since they guaranteed 90 percent of all U.S. mortgages, their collapse would have disrupted the entire U.S. housing industry.

Before 2008, Fannie and Freddie were government-sponsored agencies. They operated like a business and were expected to be profitable. But all their products were mortgage-backed securities - the government guaranteed these. This disastrous hybrid led to their destruction. They took risks to increase their profit, knowing the government would bail them out. They are both government agencies now but remain off-budget because the take-over was supposed to be temporary. 

The Federal Reserve performs a government function by managing monetary policy. It sets interest rates and controls the money supply. But, it is independent of Congress and political influences. It funds itself from earnings on its lending to member banks and their investments. It sends its profit to the U.S. Treasury each year, which is recorded as revenue in the budget.