Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Governments Pay Rent to Themselves
Transcript
- Lucas: There is a line in the federal budget every year that is roughly half a trillion dollars. It is a real outflow of cash from the Treasury. But here's the strange part — it goes to the Treasury. Luna: The government paying itself. I've seen this number and it always feels like a magic trick. How does that even work? Lucas: It's called intragovernmental payments. The most famous example is the interest the Treasury pays to the Social Security Trust Fund. As of May 2026, the trust fund holds about two point seven trillion dollars in special-issue Treasury bonds. Those bonds earn interest, and the Treasury has to pay it. Luna: Right, so the Treasury writes a check to Social Security. But that money comes from taxpayers. So it's circular — we pay taxes, Treasury sends some to Social Security as interest, Social Security holds that as an asset, and the government records it as debt it owes itself. Lucas: Exactly. In fiscal year 2025, the federal government paid about four hundred and fifty billion dollars in interest to itself. That's more than the entire budgets of the Department of Education and the Department of Transportation combined. Luna: And it's all internal. The net effect on the government's overall balance sheet is zero, because the asset and the liability cancel out. But the unified budget deficit shows that interest as an expense. Lucas: That's the key point. When you hear that the federal deficit is, say, two trillion dollars, that number includes these intragovernmental payments. So the deficit that the public cares about — the one that adds to debt held by the public — is actually smaller than the headline number. Luna: By about four hundred and fifty billion. That's not chump change. So it matters a lot when people debate whether the deficit is too high or too low. Lucas: And it matters even more for the debt ceiling debate. The debt ceiling applies to total debt — both debt held by the public and intragovernmental debt. So when the trust funds buy more bonds, the total debt subject to limit goes up, even though the government isn't borrowing from the market. Luna: So the trust fund's own growth can actually push us closer to the debt ceiling? That seems backwards. Lucas: It is. And it creates a weird incentive. If the trust fund earns a lot of interest, the total debt ceiling number rises. So to stay under the limit, the Treasury sometimes has to take 'extraordinary measures' — basically stop issuing new intragovernmental debt temporarily, or redeem existing ones early. Luna: I remember reading that in 2023 the Treasury actually suspended reinvestment of the Civil Service Retirement and Disability Fund to stay under the limit. It's like the government is playing accounting games with itself. Lucas: Exactly. And the whole thing rests on a legal fiction. The trust funds hold these bonds, but the bonds are not backed by any specific assets. They're essentially promises from one part of the government to another. When Social Security needs to redeem them to pay benefits, the Treasury has to raise cash — either from taxes, from borrowing from the public, or from cutting other spending. Luna: So the trust fund isn't a piggy bank full of cash. It's more like an IOU from the government to itself. And when it comes time to cash in, the money has to come from somewhere real. Lucas: Right. And that's why some economists say the trust fund is a 'fiscal illusion.' It makes people feel like Social Security is pre-funded, when in reality, the benefits are paid out of current revenue. The trust fund just tracks the government's promise to pay itself later. Luna: But it does serve a purpose. It forced the government to record a liability. Without it, the future Social Security shortfall would be even less visible. Lucas: That's a fair point. The trust fund provides transparency — at least in theory. But the accounting is complex enough that most people don't realize that the four hundred and fifty billion in interest is not new money for the economy. It's just a transfer within the government. Luna: So when we look at the deficit, should we subtract that? Is the 'real' deficit the one excluding intragovernmental payments? Lucas: Many economists do exactly that. They look at 'debt held by the public' as the economically meaningful measure. That's the debt that competes for capital in financial markets. Intragovernmental debt is just an accounting entry. But the unified budget includes it, and that's what gets reported in the news. Luna: And that can mislead people. If the headline deficit drops because interest rates fall, but the intragovernmental interest also drops, the public might think the government is in better shape than it really is. Lucas: Or vice versa. If rates rise, the intragovernmental interest payments spike, and the deficit looks worse, even though the net fiscal position hasn't changed. That's exactly what happened in 2023 and 2024 when the Fed raised rates. The Treasury's interest costs to the public went up, but also to the trust funds. Luna: Let's talk about the trust funds specifically. Social Security has two: Old-Age and Survivors Insurance, and Disability Insurance. Together they hold about two point seven trillion. Medicare's Hospital Insurance trust fund holds another two hundred billion or so. Lucas: That's almost three trillion dollars in intragovernmental debt. And the interest on that debt is paid out of general revenues. So, in effect, the general fund is borrowing from the trust funds and paying interest. But because the trust funds are part of the government, the net effect on the government's total net worth is zero. Luna: But that's not true for the trust funds themselves. They earn that interest, which extends their solvency. The Social Security trustees' annual report projects that the OASI fund will run out of reserves in 2033 or so. But that projection depends on the interest rate assumptions. Lucas: Right. If the trust funds earn higher interest, they last longer. But that interest is paid by the Treasury, which means more borrowing from the public or higher taxes. So it's a zero-sum game within the government, but it affects the timing of when Social Security can pay full benefits. Luna: There's also a weird historical angle. The trust funds were deliberately overfunded in the 1980s, under Alan Greenspan's commission, to build up a surplus for the baby boomers. That surplus was then lent to the Treasury, which spent it on other programs. So the money that was supposed to be saved for Social Security was actually spent on tax cuts and defense. Lucas: That's the classic 'trust fund as piggy bank' story. The government used the Social Security surplus to make the unified budget deficit look smaller. In the late 1990s, the unified budget was in surplus, but if you excluded Social Security, it was still in deficit. That's how the government can claim it balanced the budget while still adding to debt held by the public. Luna: It's like the government is running a shell game with its own accounts. And the intragovernmental payments are the mechanism that makes it work. Lucas: Exactly. So next time you hear that the deficit is X trillion, ask whether that includes intragovernmental payments. The answer is almost always yes. And then ask how much of that is just the government paying interest to itself. Luna: And if you want to understand the real fiscal picture, look at debt held by the public. That's the number that matters for interest rates, crowding out, and fiscal sustainability. Lucas: Before we wrap, I want to quickly mention something that keeps this show going. If you find conversations like this useful — the kind that help you see through the accounting fog — listener support is what makes it possible. We don't run ads, and we want to keep it that way. Luna: Yeah, it's a small thing, but it makes a big difference. If you've ever thought, 'I wish more people talked about fiscal policy this clearly,' you can help by supporting the show. Lucas: It's at buy me a coffee dot com slash fexingo. No pressure, no perks, just a way to keep the episodes coming. And now back to the accounting. Luna: So one more layer: intragovernmental payments also include things like the interest on the Military Retirement Fund, the Civil Service Retirement Fund, and the Highway Trust Fund. It's not just Social Security. Lucas: Right. There are dozens of trust funds. In total, intragovernmental debt is about six point five trillion dollars as of mid-2026. That's roughly a third of total federal debt. So it's a huge chunk of the balance sheet. Luna: And that means when we talk about the national debt being thirty-five trillion, about six and a half trillion of that is money the government owes to itself. It's not owed to China or to bondholders — it's owed to its own programs. Lucas: Which is why some people say, 'The debt isn't that bad because we owe it to ourselves.' But that's only partly true. The debt held by the public — about twenty-eight trillion — is owed to real investors. The intragovernmental part is internal. But the distinction matters because the interest on the public debt goes to outside investors, while intragovernmental interest is recycled. Luna: So if you're worried about the national debt, focus on the twenty-eight trillion. Not the thirty-five. But also remember that the six and a half trillion represents future claims on taxpayers when the trust funds need to be redeemed. Lucas: Exactly. It's a deferred liability. The bonds are real promises. They just happen to be held by government entities. So the distinction is real, but it doesn't mean the intragovernmental debt is meaningless. Luna: Alright, so to sum up: intragovernmental payments are large, they distort the headline deficit, they create debt ceiling drama, and they represent a promise to pay future benefits. Not magic, just accounting. Lucas: And behind the accounting is real fiscal policy. The next time you see a budget debate, listen for whether anyone mentions intragovernmental payments. Chances are they won't. But now you know to ask.