Accounting is dull by nature, and the only thing that makes the
craft less appealing is when it deals with the finances of government. I will do my best to make it interesting
because the way our country accounts for its finances demonstrates a
breath-taking indifference to reality.
On Monday, the Congressional Budget Office released its “Updated Budget
Projections: 2015 to 2025”. While the
report drew extensive media coverage, what isn’t covered is the disconnect
between how money actually moves and how the numbers are calculated. The headline number is just a number.
A budget should tell us about the balance of revenue and
expense within our government. The
budget reported by CBO portrays liabilities as assets, loans as income, and debt
as nothing. This picture tells us
nothing about the actual finances of the government. It is more of a Jackson Pollack which is
roughly the equivalent of a financial Rorschach test.
The biggest problem is of course the inclusion the revenue
and expense of Social Security. It isn’t just the size of the program. The way that figures are included in the
budget defies common sense, any level of accounting standards, and
even current law.
In the headline number[i],
CBO’s accounting practice treats Social Security as a profit and loss center
for the government. Payroll taxes are
booked as revenue indistinguishable from income taxes. If we collect more in payroll taxes than we
spend, it is a profit to be used to offset spending elsewhere in the budget.
This depiction of course is inconsistent with current
law. As the Trustees note, “The
Social Security Act prohibits expenditures from the OASI and DI Trust Funds for
any purpose not related to the payment of benefits or administrative costs for
the OASDI program.“ Social Security
taxes are not general tax revenue.
CBO not only books Social Security contributions as general
revenue, it does not book the offsetting cost of future benefits associated
with collecting payroll taxes. When the
government collects a dollar of payroll taxes, it makes a commitment to pay
roughly a dollar of benefits in the future.
That isn’t tax revenue. That transaction
is what normal people call a loan.
The budget of the federal government is like you borrowing $100,000
from a bank and declaring that loan as income on your 1040. You wouldn’t do
include this income on your personal return because overstating your income
would cost you more in taxes. The
government on the other hand has no disincentive to overstate its revenue. In fact, inflated revenue can be a trumpeted
success.
How much? CBO says
that the government collected roughly
$3 trillion in 2014. It says separately
that the Social Security contributed $877 billion to total revenue. How much expense does CBO set-aside within
the budget for the repayment of the loan?
Zero. Nearly 1/3rd of
the revenue booked by the government’s chief accountant is really a loan which
is kept entirely off-balance sheet.
The budgeting process slowly brings these off-balance sheet
loans onto the books over time. Instead of booking the actual cost of
collecting payroll taxes, the CBO expenses the cost only when benefits are
actually paid. This approach enables CBO turns a system which created $1.8
trillion in liabilities over 2014 into a $30 billion profit.
To give you some idea of how long these loans can stay
off-balance sheet, the Veterans Administration is still
paying pension benefits from the Civil War!
To give you some idea of the magnitude, Social Security’s unfunded
obligations grew by $900 billion simply because we moved the clock forward by a
year. That is effectively the interest
due on the off-balance sheet loans.
Let’s take two transactions out of the headline number. If we booked the revenue from Social Security
as a loan instead of general tax revenue, the government would have collected only
2.27 trillion in revenue instead of roughly $3 trillion. If we book the cost of interest on the off-balance
sheet loans, the outlays increase to nearly $4.5 trillion. So the reported deficit of $486 billion would
balloon to more than $2 trillion under even lax accounting standards.
The headline number of the budget says that the budget
deficit was $486 billion in 2014. That
figure only has meaning provided that the government in 2014 did not have any
intent to pay a penny of Social Security benefits in the future due on all of the
payroll taxes that it has collected over the last 80 years. That is what the number we all quote actually
means.
There is no raid on Social Security in reality. We just run our books as though there were.
[i] Supporters
for CBO’s figures will tell you that the reports break-out the information
related to Social Security. That material is much like this footnote, a
disclosure that few read and no one reports.
No one ever asks the question if Social Security belongs in the budget,
nor why the reporting is inconsistent with current law.
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