Credible commitments? The politics of federal government trust funds

Federal government trust funds--such as the Social Security, Medicare, and Highway Trust Funds--play an increasingly prominent role in the budgetary process. This study provides a systematic examination of the political significance of the trust fund device. The study addresses two fundamental questions: Why would elected officials narrow their budgetary discretion by setting aside revenue for particular uses? What difference do trust funds make for the character of the policymaking process? Case studies of the origins and evolution of key trust funds reveal that policymakers have established trust funds in order to promote a variety of policy objectives, but that a desire to add durability to political commitments has been the dominant motivation. Trust funds thus represent an attempt to stabilize the political environment. Indeed, clientele groups tend to regard any attempt to divert trust fund revenues to other uses as a "breach of faith." Yet while the intent of trust funds is to make budget promises harder to reverse, they can actually make programs more vulnerable to cutbacks under certain conditions. The creation of a trust fund establishes an expectation that the fund will remain in long-term balance. When trust funds face the prospect of depletion, politicians may be able to slice benefits, raise taxes, and take other steps that can be sold as necessary for restoring the funds to "solvency." In sum, trust funds play a critical role in both defining and circumscribing the social contract. The major lesson of the study is that although political actors cannot bind their successors through structural innovations, they can transform the incentives future officeholders face.