When should the government report future liabilities?

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.


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