October 31, 2006
By Alison Acosta Fraser
Accounting Standards Advisory Board issued a report on October 23
calling for changes in financial reporting for social insurance
programs. This is an important step that will provide better
financial information on the operations of the federal government.
It will also help to begin a serious discussion of how the huge
impact of future entitlement spending should be reflected in the
federal budget. Social Security and Medicare represent a growing
threat to the federal budget, one that bodes ill for future
generations. Understanding and indicating their financial effect on
the nation's fiscal burden is key to sound financial
What is FASAB and
What the Report Did
Accounting Standards Advisory Board (FASAB) is a rather obscure
quasi-governmental organization that establishes the generally
accepted accounting principles (GAAP) used to prepare the federal
government's financial report. These standards are established
through "Statements" issued by a joint public- and
private-sector-member board. FASAB considers a broad array of
viewpoints and input in establishing these standards, and its
deliberations often take a few years before a final standard is
issued. FASAB's new report aims to strengthen financial reporting
for social insurance programs. Because there are two views that
differ strongly on how best to accomplish this, the report
establishes common ground and then discusses each view in depth.
FASAB is requesting public comment before it proceeds with a final
Why Better Financial
Information on Social Insurance Matters
and Medicare will cause the total federal budget to more than
double in 45 years, from nearly 21 percent of the economy today to
50 percent by 2050, according to projections by the Congressional
Budget Office. This will leave a stunning gap between these
exploding spending programs and revenues (also projected to
increase as a percentage of the economy) and thus some very tough
choices for Congress and the president. It is imperative that the
nation better understand the full extent of the obligations and
commitments of these programs.
Financial Statement of the U.S. Government, prepared by the U.S.
Treasury and audited by the Government Accountability Office, shows
total liabilities of $9.9 trillion, including Social Security and
Medicare benefits due to current retirees at the end of last fiscal
year under current law which have not yet been paid. This measure
is often referred to as "due and payable." It also includes a large
volume of information about these programs in a section called the
Statements of Social Insurance (SOSI), much of which is meaningful
to only a relatively small group of policy experts. Carefully
culling through this information, one would find that the long-term
unfunded obligations of these programs total $35.6 trillion,
bringing the nation's total fiscal burden to $45.5
trillion, over 3 times the size of the U.S. economy.
According to David
Walker, the U.S. Comptroller General and a long-time proponent of
more transparent financial reporting of social insurance, this
represents a debt of $375,000 for every full-time worker in
American. Like a mortgage-without the house. Walker is right, and
such growing threats to the nation's fiscal health deserve better
disclosure in the financial statements, though there is vigorous
debate about the best ways to accomplish this.
Two Views on Needed
agree that financial statements should help Congress, the media,
and the public make informed decisions about whether these social
insurance programs are sustainable as they are designed today,
whether the federal government's financial position has improved or
worsened due to these programs, and to what extent these programs
will be able to provide benefits in the future. But there are two
views on how to do this. Both-the "Primary" and the
"Alternative"-agree that information on social insurance programs
The views differ
on how and what to include in the financial statements. According
to David Mosso, FASAB Chairman, both views would include the
present values of projected future program revenues and scheduled
benefit payments, changes in present values during the period, and
other disclosures on sustainability, though they differ on the
details and the format of the statement. They would go about this
in different ways, however. The biggest differences between the two
views concern when a liability should actually be booked and how
much of a liability to recognize.
The Primary and
liabilities for social insurance programs are recorded when they
are due and payable. "Due and payable" refers to a legal obligation
to pay for a good or service that has been provided when payment is
due but has not yet been remitted. This is like getting a bill for
a doctor's visit or legal services that were rendered but not paid.
Since the bill is both payable and currently due, it would
be accrued as a liability.
Under the Primary
view, held by six of the ten board members, the federal government
would change the way this liability is recognized to when
"participants substantially meet eligibility requirements during
their working lives…. The liability would be the accumulated
unpaid expense as of the reporting date."
For Social Security and Medicare, this would first occur when
participants complete 40 quarters of work in covered
Under this view,
it is akin to an employer first booking a liability for an
employee's pension benefits once they are vested, even if the
benefits will be paid far in the future, and then, for Social
Security, increasing that liability each additional year the
employee works and earns more future benefits. However, dedicated
payroll taxes would not reduce this liability, unlike most
discussions of Medicare and Social Security's finances today.
The Primary view
would also explain how these liabilities relate to the net present
value of these programs' obligations and revenues reported in the
SOSI so that readers could understand them and understand dedicated
payroll taxes in the long-term context.
The Primary view
members followed the private sector accounting model for developing
this proposed treatment. They observed strong similarities, in
their view, between these social insurance programs and private
sector pension and retiree health benefits and cited the need for
formally recognizing their financial commitments.
view, held by three members (one member abstained), would continue
the present practice of recording liabilities when they are due and
payable. Last year's financial statement reported $72.7 billion in
such liabilities for Social Security and Medicare.
This due and payable liability model is a key feature of the
Alternative view would change the accounting for earmarked revenues
like the payroll taxes for Social Security. Payroll taxes for
Social Security currently exceed Social Security benefits, and
these unused revenues are then spent on other federal programs.
This is tracked as an IOU from one part of government, the
Treasury, to another, the Social Security Trust fund, much as an
individual might take $10 from a piggy bank to pay for lunch and
put in an IOU to pay it back in the future. These IOUs are not
treated as liabilities in the financial statements. Instead, under
today's way of financial reporting, these IOUs from the Treasury to
the trust fund net out to zero. But excluding them from the
financial statements, says the Alternative view, presents a
misleading picture of the government's finances and further creates
misunderstanding among lawmakers and the public.
view would also include a report on changes in the net present
value of social insurance commitments and explain the cause of
these changes. Proponents of this view would also include a
statement of fiscal sustainability. These changes would show, in a
clear way, whether the nation is fiscally better or worse off than
in the preceding year and why.
Those who support
this view feel strongly that there are no similarities
between private sector pensions and retiree health care. They argue
that social insurance programs can be changed by Congress at any
time and do not constitute the same kind of contractual obligation
as due and payable liabilities or private sector retirement
Americans-Congress, the president, the media, and the public-should
have sufficient information to evaluate the financial condition of
the federal government. Steps to improve information on long-term
obligations and the fiscal sustainability of social insurance
programs are sorely needed. Today the nation is on an unsustainable
fiscal path, but it is difficult to know this from reading the
financial report. Moreover, long-term spending issues rarely make
it into annual budget discussions. The budget process should also
be fixed to include long-term measures of social insurance
liabilities and associated policy changes in such a way that
lawmakers can evaluate reforms over the short term and the long
disagreement about how best to proceed within the FASAB. But, more
importantly, there is agreement on the need to do so. FASAB's
proposals, and the discussion they will prompt on how to best
measure entitlements, are welcome steps toward providing better
information and deserve to be thoroughly evaluated by the
government and the public. As the FASAB emphasizes, the nation must
have better financial information that will force Congress and the
President to address these programs before their crushing costs
become due and payable.
Fraser is Director of the Thomas A. Roe Institute for
Economic Policy Studies at The Heritage Foundation.
Measured in net present value terms. This is the amount of money
that would have to be invested in government bonds today in order
to pay these future promises.
Adding in other commitments, like those to the Pension Benefit
Guarantee Corporation, brings this total to $46.4 trillion.
Accounting Standards Advisory Board "Accounting for Social
Insurance, Revised," October 23, 2006, at
This consists of $36.3 billion for Federal Old-Age and Survivors
Insurance, $16.8 billion for Medicare Part A, and $16.6 billion for
Medicare Part B.
Social Security and Medicare are a growing threat to the federalbudget, and providing better information about their liabilitieswill help the public and policymakers to address them seriously.
Alison Acosta Fraser
Senior Fellow and Director of Government Finance Programs
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