When should the government report future liabilities?

by on October 23, 2006 at 9:12 pm in Economics | Permalink

The FASAB has asked that the United States government start including future Medicare and Social Security liabilities in current budget deficit figures:

Monday, the Federal Accounting Standards Advisory Board released a proposal in which the government would have to account for the cost of future Social Security payments year by year as people build up entitlements.

Seen in advance of its release by the Financial Times, the switch in accounting practices would be an international accounting anomaly, as most other governments treat social insurance as a political commitment to pay future benefits rather than a financial liability, the newspaper said.

The FASAB is made up of six independent members who support the proposal and three opposing members from the U.S. Treasury, the White House Office of Management and Budget and the Government Accountability Office.

Here is an FASAB press release.  Here is a longer story.  Of course the reported deficit would go up by hundreds of billions of dollars a year.

Under rational expectations, this purely nominal change should be neutral.  In the abstract, more transparency in government is desirable.  Over the longer run, government would treat promises of future benefits more like expenditures and subject them to greater critical scrutiny.   

More practically, if these benefits are counted in the current budget as liabilities, it will be politically harder to cut them in the future.  However it might not be harder to tax them, which is one but not the only way of cutting them.

If you think that tax hikes are the way to address our crushing future financial burden, you should favor this proposal.  If you prefer spending cuts, it is a harder call. 

I don’t doubt that financial markets would quickly adjust to the new levels for announced deficits.  Most voters might not ever know the difference — how many of them could name the size of the deficit right now?  But this change would draw the attention of the informed public to our future fiscal and demographic problems.  How much faith should we have in these people, relative to what our government will do on its own?

I am inclined to take a chance on this one, but I don’t think it is a simple call. 

By the way, the government is not obliged to accept this directive, but there is a great deal of precedent for following FASAB recommendations.

Matthew Cromer October 23, 2006 at 10:36 pm

Bad idea, much better to cut benefits through retirement age increases, benefit cuts for the wealthy, etc.

joan October 23, 2006 at 11:44 pm

Social security payout has a formula, so can be calculated like a inflation protected securities. But I don’t see how you can calculate 20 of 30 year in the future medicare libilities.

Noumenon October 24, 2006 at 6:00 am

Most voters might not ever know the difference — how many of them could name the size of the deficit right now?

Those are the ones who will be looking at a chart four years from now saying, “Look at how much the deficit has gone up starting in 2007! We need to do something now!” Same as the people who quote the “Americans are getting fatter” numbers without noticing the much broadened 1999 redefinition of “obese”.

David Young October 24, 2006 at 10:06 am

If they make the change they should make the calculations for at least each of the last 20 years for context. Otherwise it’s just another useless number that will only cloud debate and useful only for simple political opportunism.

save_the_rustbelt October 24, 2006 at 11:01 am

As deceptive as federal accounting is, I’m not certain this is exactly
the answer.

The FASB does not exactly have a sterling record anyway.

We need to do something about the “trust fund” farce, because it is
approaching a $2 trillion hole that will require tax increases on my
children and grandchildren to fill.

Donald A. Coffin October 24, 2006 at 11:52 am

Assuming that treating expected future expenditures
as desired by FASB, wouldn’t one also have to include
future expected tax revenues? Why include the expenditures
but not hte revenue? Just asking.

bristlecone October 24, 2006 at 2:30 pm

“What about this: It seems to me that if SS obligations count as a liability, then ANY reduction of benefits counts as a default for purposes of determining credit rating of T-bills. Would it be good or bad for any benefit reduction to be coupled to higher interest rates on new government debt?”

If you renegotiate a debt (for example, with your banker), the amount of the reduction is recognized as a “Gain” on the income statement, not a default.

save_the_rustbelt October 24, 2006 at 7:45 pm

This might make some sense only in the context of REALLY treating the trust
fund like a trust fund, and calculating a balance sheet only for Social
Security.

This would allow a calculation of the net present value of the revenue
stream versus the net present value of the benefit stream.

But that would only be a wild guess depending on the imputed earnings rate.

Hey though, maybe politicians would have to stop using the “unifed budget” fraud.

Do we smell politics in the FASAB?

William I. October 25, 2006 at 7:39 pm

Social Security and other related items are becoming big issues today in society. I agree with the ones who say that
these are just not liabilities but these are promises. These are promises whether or not they will or will not be kept.
Sociality is especially something that I feel should not be done away with. Not everyone is blessed with great
retirement plans and not everyone becomes wealthy before they reach old-age. I can understand why certain people may be
opposed to this idea of keeping social security and other related issues because it could possibly raise taxes. I agree
that raising taxes is bad, however, I believe a possible solution to this is for the Gov’t to come up with a plan for
social security and medicare and other things such as these to collect funds without raising taxes all the time. The
Gov’t could possibly figure out a way for there to be a set price for this and that money to go straight to this and to
nothing else. I guess I can possibly see why Gov’t officials are opposed by this plan because it may seem like a contract
to them because money will have to dished out from now on for these issues, but social security, medicare and other Gov’t
funding should not be done away with mainly because it is just what many people depend on and I believe that the Gov’t
doesn’t realize just how many people there are out there who truly depend on these.

hoojk December 2, 2007 at 9:02 pm

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muhabbet July 25, 2009 at 8:24 am

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