U.S. Fiscal Policy in an Era of Federal Budget Surpluses

Abstract

Gokhale examines how the US budgetary surpluses can best be managed in view of the long-term expenditure pressures that the Social Security and Medicare programmes will exert on the US federal government budget. He notes that the worsening of the American fiscal outlook in 2002 postpones but does not entirely eliminate the need to think about how to deal with a potential cash accumulation with the federal government. If the surpluses turn out to be so large that debt is eliminated and a sizeable cash reserve accumulates with the government, the funds will have to be invested in private assets. Gokhale considers four policy options, in which the assets are respectively managed by the Federal Reserve, the US Treasury, the Social Security Trust Fund (SSTF) and by private individuals via an individual Social Security account system. The last solution implies that the surpluses of the SSTF are invested in marketable debt which is attributed to individual Social Security accounts. Individuals can then trade the public bonds for private stocks and bonds. The alternative solutions are evaluated on the basis of four objectives: preserving a liquid public debt market, minimising deadweight losses from inefficient resource allocation by the government, allowing diversification of pension portfolios and improving intergenerational risk sharing. According to Gokhale, the use of surpluses to start an individual Social Security account system is the best solution.