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 number1, 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.
- 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.