Ending Governmental Accounting Tricks Posted by: McQ
on Tuesday, October 31, 2006
For years and years we've had one side warning us that Social Security is in trouble and Medicare was going to break us and the other side saying it was all unicorns and rainbows, not to worry and it would all work out in the end. No need to identify them since any astute person already knows which side is which.
Well a fairly new little cog in the federal bureaucracy called the Financial Accounting Standards Board (FASAB), established in the '90s, has called for the government to do what it should have been doing all along - follow accepted accounting practices and list Social Security and Medicare obligations as liabilities.
Naturally there is some resistance to that since, well, when you do that, it puts such a stark number out there, it's hard to deny that we may be in a bit of trouble.
Let that little number roll around in your head for a minute. That's right, your friendly government has obligated you and your heirs to pay out 39 trillion in benefits. As the head of the FASAB says:
"People are concerned about generational equity, and that's what a liability on the balance sheet really measures," says David Mosso, chairman of the FASAB. "It's a first measure of a generational transfer. It's also a good measure of what future funding measures we will have to take. It helps to inform the political debate.
"Accountants are just good scorekeepers," Mosso continued. "Our obligation is to put reliable information out there so policymakers can use it in making decisions, and the public can use it when addressing their representatives in Congress."
More importantly, it eliminates the hand-wave which is so prominent with some lawmakers use to minimize the concerns some have about future solvency. Kind of hard to do when staring 39 trillion in the face.
The reaction has been notably unsurprising:
Perhaps that's why the FASAB's three government representatives prefer not to recognize the social-insurance liability, while its six independent board members all favor the proposal. The agency is taking comments on the issue until April, and the rules aren't likely to change until fiscal 2010.
Now this doesn't change the annual budget process or how the deficit is measured. But it would effect the Treasury's report (which is essentially produces a balance sheet through accrual accounting).
There is, of course, some argument about whether it is legitimate to do this. Up until now, future Social Security and Medicare benefits have been considered mere "political promises" upon which Congress could "renege". Fat chance.
Every argument we hear about discretionary spending points to these programs as mandates and puts cuts against them in the future out of bounds. So that's a rhetorical game with no justification in reality. That said, there are still those who have qualms about including the liabilities:
Murray Weidenbaum, a Washington University economist and veteran of Washington budget battles, sees some validity to that treatment. "These are liabilities maybe in an accounting sense, but not in a legal sense," he said. "There's nothing, other than constituent anger, to prevent Congress from changing them. I certainly wouldn't put these benefits in the same category as Treasury securities."
While legally (and technically) he may have a point, in reality those promises are as real as Treasury securities to those receiving them and those expecting to receive them. I think any observer of past battles over Social Security and Medicare cuts knows how potent 'constituent anger' is in the case of these two programs.
But Stephen Moehrle, a professor of accounting at the University of Missouri at St. Louis, likes the tone of the FASAB's proposal. "These benefits meet the classic definition of a contingent liability, which involves two questions: Is it estimatable, and is it reasonably probable to be paid? Absent some tangible evidence that the liability will be reduced or eliminated, I think you should go ahead and record that liability."
Me too. Then, perhaps, we can get past the politics of this, and actually have a discussion about the reality of the situation politicians have managed to promise us into. And with that number hanging there, perhaps we'll be able to introduce a dose of reality into the discussion and eliminate the happy talk which continues to wave-off looming fiscal disaster for the sake of political advantage.
I think another part of the problem is size of the number. I mean, I really can not conceive of a ’trillion’ anything. It was difficult enough back in the day listening to Carl Sagan’s ’billions and billions of stars’ - and now we’re talking exponentially larger than that.
There is, of course, some argument about whether it is legitimate to do this. Up until now, future Social Security and Medicare benefits have been considered mere "political promises" upon which Congress could "renege". Fat chance.
Every argument we hear about discretionary spending points to these programs as mandates and puts cuts against them in the future out of bounds. So that’s a rhetorical game with no justification in reality.
I disagree. Back when Bush was trying to revamp social security I was still reading Matthew Yglesias’s blog. Long story short, he and the other quite liberal commenters were more than willing to accept program cuts would be necessary to balance the books. But not privatizing which was anathema to them. I’m willing to bet that when push comes to shove you’re going to see people getting their SS benefits later (justified by people living longer) and possibly getting smaller checks. When the S hits the fan, this will have to be put on the table.
The problem with social security is that we should have fixed it decades ago, when the boomers were reaching peak earning potential and there was excess capacity that could be used to reform the system. Reagan or Bush, Sr. should have tackled it. Instead GHWB just "fixed" it by raising taxes. Now that the boomers are approaching retirement, there isn’t enough time to reform the system into something more reasonable.
This isn’t news. Bob "tax collector for the welfare state" Dole, of all people, pointed out in his 1996 campaign that to fund these programs, given projections in effect at that time, tax rates would have rise to 80% of income or thereabouts by 2030 or 2040 or somewhere in there (I forget the exact year).
And how much attention did this get? None of consequence. Every time I brought it up, nobody in the group had ever heard it. The so-called journalists in the mainstream media would much rather cover horse-race aspects that issues, especially issues that might tend to go against their precious liberal welfare state.
We might as well face it. Politicians are stuck begging votes from those who would see their benefits cut, and dealing with a press whose eyes glaze over at anything that requires real analysis. They’re not going to do anything until a countervailing force is strong enough. That probably means we have to be at meltdown or very close before action will be taken. I don’t care much for that conclusion, but I don’t see how any other one is more likely.
My one hope is that Europe’s welfare state woes will predate ours by a decade or two, and even the most oblivious politician may be able to draw some lessons from them. But that’s just a hope, not a prediction.
And how much attention did this get? None of consequence.
Understood. But again, saying it and seeing it routinely as a part of the balance sheet of the nation are completely different. When it is presented as an integral part of our computation of assets and liabilities, it is hard to deny the problem or pretend everything is rosy. There it is, with a "T".
Now what? You can’t ignore it anymore, or pretend it isn’t there, reformers won’t let you. In all I see this as a very important change in terms of framing the debate. And yes:
My one hope is that Europe’s welfare state woes will predate ours by a decade or two, and even the most oblivious politician may be able to draw some lessons from them.
But with some of the head-in-the-sand crew in politics around here, that may not even be enough. Watching this obligation grow, however, may even force them to recognize the looming fiscal disaster.
Your link is only to an article discussing the FASAB proposal, so I haven’t read the underlying report.
But assuming that the 39 trillion is the net present value of the liability in perpetuity, we need to put something on the other side of the ledger. What is the net present value of the government’s ability to tax at, say, 25% of GDP? what is the size of the available asset?
TBD ... and that’s the point all of those who have been pointing to this mounting obligation have been asking ... how are you going to satisfy it? By what means?
Right now, government spending as a percentage of the GDP is about 37%. France comes in at 54%. It doesn’t take a rocket scientist, given their economic problems, to understand we don’t want to be in that position in coming years. But given the obligation, we’re certainly headed that way, aren’t we?
Unfortunately, our governmental system is not really capable of implementing long term solutions to this problem. It takes an immediate crisis atmosphere to get things moving, and then things lurch (frequently) in the wrong direction. Bush’s efforts to address the pending Social Security crisis illustrate what happens to a politician who actually tries to do something to solve a long-term problem. The other party will — inevitably, I am afraid — seek to gain political advantage by distorting the issues and playing on the fears of those politicians of the President’s party who should know better. This is not meant as a partisan comment....I would be surprised, if a Democrat President would not be victimized in the same way by the Republicans! I guess it says something about the quality of leadership in our legislative bodies that is not very flattering!
I have real problems with "net present value of the government’s ability to tax...". The soviets and other socialist economies have an ability to tax approaching 100%. We’ve had three revolutions based on taxes. One sucessful and two (the Whiskey Rebellion & the War of Northern Domination and Taxation) not. But it is a fine old American tradition. Has anyone studied what the Americans’ tipping point might be? Or is the "bread & circuses" mentality too entrenched to be challenged?
Oh. Posted before I completed the thought that higher taxes will stifle growth and lower standards of living for most, which may lower the tipping point.
perhaps we’ll be able to introduce a dose of reality into the discussion and eliminate the happy talk which continues to wave-off looming fiscal disaster for the sake of political advantage.
Any time you’re ready to introduce a dose of reality into this debate, I’m ready for you to start. You’ve made a p***-poor start of it so far by following the Republican playbook - wave around one very large number from a galaxy of other very large numbers, with no context whatsoever.
For example: US GDP has been about $11 trillion per year recently. So what’s the horizon over which we owe this $39 trillion? Shall we assume, the lifespan of currently living citizens? Okay. 70 years or so. Even if GDP held flat over the next 70 years - which is ridiculous - that would give us a pool of..
$770 trillion dollars - in produced value - from which to pay this $39 trillion.
Hmm, 5% of our total value on helping old and sick people not starve in the gutter. How will we survive this ***looming fiscal disaster****!!!!!!
Give me a break. The strategies and options for paying for social security’s rising liabilities are almost literally unlimited. The **looming fiscal disaster** equals "someone might raise our taxes to pay for Social Security OMG!!!" - which is only one *possible* choice.
Any time you’re ready to introduce a dose of reality into this debate, I’m ready for you to start. You’ve made a p***-poor start of it so far by following the Republican playbook - wave around one very large number from a galaxy of other very large numbers, with no context whatsoever.
Always nice to hear from the "hand-wave" crowd. Heh ... Republican playbook ... what, am I supposed to use the Democrat playbook and pretend there are no future obligations and if there are, further pretend they’re all under control and completely funded?
39 trillion, as should be obvious to anyone with the ability to turn on a computer, is the estimated liability TODAY (that’s the context) of future payments in both programs. Obviously that will change. But it is something we can at least look at and talk about.
But that’s the not the sort of reality the hand-wavers want out there ... so we get reactions like yours.
One sucessful and two (the Whiskey Rebellion & the War of Northern Domination and Taxation) not.
And it’s a good thing both failed, since each invovlved rebellion against perfectly valid and constitutional taxes, and the Civil War was really about the Southern oligarchy staying the biggest fish in their pond by making their pond smaller.
I would have preferred the Whiskey Rebellion to be openly successful, even if it meant George Washington being shot out of the saddle—but only because it might have meant the ridiculous excise taxe power might have been removed from the constitution.
Hmm, 5% of our total value on helping old and sick people not starve in the gutter.
Which has virtually nothing to do with what most SS dollars are going towards and the simple fact is it is not in the job description of the federal government to provide medical care to the elderly.
So it shouldn’t do it.
And frankly, given the time frame over which the boomers are most likely to need it, the period to divide the 39trillion over is more like 20 years, not 70, and it would not be distributed evenly either.
Paying my share of that in the crudest of calculations means I can’t afford the second of the two children I’d like to have, and those taxes are not authorized in the constitution.
Glasnost, I’m telling you as cordially as I can, go to hell and scream for eternity. You thief.
Tell you what, I’ll go ahead and have that child, and when you come to collect the gold, at the worst of it, I’ll give you lead instead. Probably at around 2900fps.
Wait, was the guy whose shiboleth was Lockbox the Unicorns and Rainbows guy or was it the guy who told us we had penty of money rolling in to cut taxes, pay down the debt, and still run a surplus? Wait, you’re right, it is easy to see which side is which. Welcome to the side of the light.
But it is something we can at least look at and talk about.
Okay. I’m in a nasty mood. Let me take my medicine. It’s a good thing to get numbers we can talk about. Consensus. Woo-ha.
The pro-privatization crowd, from Republicans and their allies in the New Republic, is to throw these very large numbers into the crowd, with no context, and use the sheer size of the numbers involved to imply that, with numbers that large, disaster must reaaaallly be inevitable, when few informed observers would consider this correct, or even worthy of the pretense of seriousness.
If you keep it to, "well, we have some real liability numbers here, that’s a good thing, hoorah!", you’ll get my Blog Silence of High Regard. If you drop in the talking point buzzwords, you’ll get.. angry handwaving responses.
Thanks for the death threat, Tom. If I didn’t think you were a blowhard, I’d request that the administration here report your IP to the FBI. But - this is something you could learn from - since I can tell the difference between a blowhard death threat and one with some seriousness behind it, I’m not going to waste my time. Just like debating you, defending myself from you is a joke.
On the other hand, here’s a word to the wise: be careful with your trash talk. Others, more vindictive than I and with more time on their hands, might use statements like this to complicate your life.
I find it interesting (but not surprising) that everyone keeps ignoring the asset side of the ledger when they discuss changing to accrual accounting. While we may not be able to put values on national parks, there are plenty of "federal buildings" and the like that have asset value. So while the liability numbers are scary, it would be helpful to see the full picture.
My point is that the media and political class will have so many different numbers to spin after any change that the result will probably be less clarity, not more.
Personally, I would love to see a switch to full accrual accounting for two basic reasons.
1 - I would like to see what assets my tax dollars are obtaining. I keep seeing the government building and buying new stuff with my money, I would like to know what it’s worth.
2 - Maybe if we actually put the SS liability numbers out there, some polticians might see an opportunity to wipe out those numbers by simply privatizing the system.
Imagine being able to "fix" social security and wipe out most of the "debt" at the same time. Maybe that would actually give some pols the courage of their (supposed) convictions.
Not bloody likely, but it presents an interesting opportunity.
