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Washington is a battleground this autumn and the federal budget lies at the heart of it. That is not news. What is surprising is that accountants are the soldiers. An obscure agency—the Federal Accounting Standards Advisory Board—is trying to redefine what is a contract and force the government to adopt a new definition of the budget deficit.
The federal budget is seriously misaligned over the long haul and social insurance entitlement programmes are the reason. Social Security (government pensions) and Medicare (the healthcare system for over-65s) now cost less than nine cents out of every dollar of gross domestic product, but an ageing population and rising healthcare spending will cause these programmes to explode to 20-30 cents over the next 50 years. By comparison, the entire federal budget has averaged 20 cents of each dollar over the postwar era, so the problem is clear.
This problem has been spelled out for years in annual documents from the Office of Management and Budget and the Congressional Budget Office. The trustees of the Social Security and Medicare programmes issue annual reports outlining the problem as well. For good measure, the Treasury includes in its annual Financial Statement of the United States Government a section that makes the same point: rising entitlement spending will steadily threaten first the budget and then the private sector in the next 50 years.
FASAB enters the fray with proposals to require the budget to be charged now with every future dollar of Social Security and Medicare spending, calculate a new version of the budget deficit, audit its underpinnings and publish it as the bottom line each year in the financial statement. Proponents of this position argue that new rules would make federal government accounting just like the private sector’s for pensions and retired people’s health benefits, thereby increasing transparency and, by inference, resolving our looming problems.
There are three problems with this approach: it is wrong, because the differences between the government and private companies make identical standards impractical and even undesirable; FASAB’s calculations are riddled with internal inconsistencies; and the new proposals would probably do more harm than good.
FASAB’s basic approach is to bolt on to the federal government the apparatus of private sector financial accounting. But this is silly. What company has the sovereign power to raise revenues by taxing? What company can print money? What values should these have on the balance sheet? Social Security and Medicare cannot be valued like market transactions between companies and employees regarding pensions or health coverage in retirement because the private sector, lacking the government’s ability to tax, could never fulfil a contract for such long-term obligations. For example, Social Security benefits can be paid in 2050 to individuals currently working because the government will tax people who are not yet born.
Income and net worth financial accounting serve the valuable role of permitting investors to compare performance across companies and dump poor performers in favour of others. However, there is no financial escape from the federal government.
The computations FASAB proposes are arbitrary and potentially misleading. The basic notion is to add up all liabilities of the federal government and net them against its assets (or, similarly, calculate the annual change in liabilities and assets). But federal financial obligations have varying degrees of firmness. Treasury securities are firm contractual liabilities that cannot be changed. Social Security benefits are a far less fixed promise—Congress changed them regularly until the late 1970s. Medicare benefits are even more malleable. Why should these be equated with Treasury bonds?
At the other end of the spectrum, Congress is required by the constitution to provide for national defence, but as a future obligation FASAB would leave this out of the calculation of the deficit.
There are puzzling omissions, such as Medicaid, the programme for low-income people. Many retired people are on both Medicaid and Medicare, but only their drug spending in Medicare would be granted the certainty of a liability while the rest of their healthcare in Medicaid would not.
The FASAB proposals are not likely to provide a clearer picture of the federal government’s financial outlook. But are they harmful? Possibly. It is essential to rework entitlement programmes in parallel with the ageing of the population and the changing demands for retirement income, health insurance and long-term care. If counting entitlement spending as a liability conveys the notion that these benefits are fixed and contractual, it will make these desirable shifts harder, noteasier.
The effort to feature thousands of billions of dollars in entitlement liabilities on the federal books is a costly distraction. FASAB was created to ensure that federal agencies used common accounting standards, disclosed the cost of government programmes and performed well enough to pass audits. FASAB should focus its attention on this important mission that is not yet complete.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.