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The Feds May Have to Come Clean

October 23, 2006, 8:04 pm

From Marginal Revolution:

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.

I support this change despite the fact it may result in what I consider bad outcomes (e.g. big tax increases) as the magnitude of future liabilities become clear.  Tyler Cowen also argues it may make these programs harder to scale back, since it shifts the future payments from a political promise to a financial commitment.  But just like free speech, one has to be consistent in one's support for transparency.

If this all seems arcane to you, let me give you some perspective.  Today, Jeff Skilling was given over 30 years in jail for various accounting-related frauds, supposedly hiding losses and liabilities from shareholders's view.  But what Skilling was convicted of doing were minor, subtle accounting tricks involving penny-ante sums of money compared to the egregious games Congress plays with accounting for the federal government's future liabilities.  Skilling was accused, for example, of booking future liabilities in certain joint ventures where they were hard to find; the feds, in contrast, do not book future liabilities at all.

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Category: Government
  • http://politics.lel-hosting.com/ Matt

    It's not a real liability if you can walk away from it the day it comes due. The Supreme Court has ruled that Social Security benefits are not property until payment is actually made...Congress is (as it should be) perfectly free to abolish the program at any time of its own choosing, without legal consequence. Congress is also free to alter the benefit structure retroactively while leaving the program in existence.

    The only Social Security payments which are true obligations in the same sense that personal and corporate debts (and, for that matter, government bonds) are obligations are the payments for which checks have already been printed and mailed. Those checks must be honored when presented for payment...but Congress is free at any time to tell SSA to stop sending more of them, and if it does so, the rest of government will continue unchanged.

    Enron didn't have that choice. They eventually had to either make good on their obligations or declare bankruptcy.

  • http://www.linesinthesand.net Doug Murray

    This is the best news I've seen this century!

    I work in the insurance industry where the government would instantly shut down any company that declared its promises to pay were "treated as a... commitment to pay future benefits rather than a financial liability."

    Bookings these obligations as liabilities now may make it hard to scale back, but it will be equally hard to add new benefits without recognizing the cost. I call that a net gain.

    And Matt, there is little difference between Congress walking away from its commitments and Enron declaring bakruptcy. Either can be done legally, but not without serious consequences.

  • Mike Lutz

    My university, like all others, has been affected by the FASB rules stating it has to show reserves sufficient to cover future retiree medical expenses. The result is a big bite out of our endowment, which now is encumbered to cover this liability. Despite the problems, I think this paints a more accurate picture of our financial position.

    This is in spite of the fact that the Board of Trustees could change the retirement benefits at any time; we're a private school, and many of the obligations are implied rather than contractual. I believe FASB rules are recognize that while such changes are possible, they are highly unlikely given the turmoil that would result. The same rationale applies in spades to Social Security, where the number of individuals involved clearly dwarfs the size of our faculty and staff.