Trust Funds and National Output

Abstract

A new look at the effects of trust fund movements on the level and composition of national output seems long overdue. Trust funds, especially those associated with pension and welfare programs, are becoming increasingly significant in the economy. But the mere bulk of trust funds today is not the only reason why a new analysis is needed. Another reason is that when thinking about the effects of trust fund movements our minds seem prone to run along the narrow groove cut by Keynesian under-employment equilibrium theory, a theory fit for a special situation, but certainly not for all times, and perhaps not at all for the years ahead. Once in the Keynesian groove, we are led to conclude that trust fund accumulation reduces national output but does not affect capital formation.' And still further, that any attempt by society to save more of a given income is doomed to miserable failure, a corollary of which is that one generation cannot by saving provide for its own future retirement needs. In this paper we shall try to make clear when Keynesian results can be expected, but also under what conditions other, and far different, results obtain. Though the analysis is quite general, it is most relevant to the accumulation of funds for retirement programs. As a concrete example, also most relevant to public policy, we take the Federal old-age and survivors insurance (OASI) program. But the analysis, and the technique of numerical estimation, will apply to all trust fund movements. Though focused on the effects of fund accumulation, the analysis is perfectly reversible for the effects of trust fund reductions.