A Halloween mask for Social Security

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Last week, President Bush promised to step, once again, onto the "third rail of politics" by renewing his call to partly privatize the Social Security system.

Unless voters surprise pollsters by giving Republicans a clear victory in next week's congressional elections, his chances of success are slim.

"It depends on whether Bush retains control of both houses of Congress," says Stephen Spear, an economist at Carnegie Mellon University's business school in Pittsburgh. He figures that trimming Social Security is so unpopular that Mr. Bush will "run into the same [political] firestorm" he did in 2005, when he proposed letting Americans put a portion of their payroll taxes into individual savings accounts that might, or might not, provide a better return than Social Security.

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Interviewed last week on CNBC, Bush said he wanted to assure people that their payroll taxes aren't going into a "bankrupt" system. "I want to deal with the unfunded liabilities inherent in Social Security and Medicare," he added.

Curiously, a little-known government body, the Federal Accounting Standards Advisory Board, on that same day put out for public discussion a proposal that might, a year from now, magnify those unfunded liabilities by hundreds of billions of dollars. If the FASAB eventually approves such a change in the accounting of federal social insurance programs and the government goes along, it would not change the financial realities of either Social Security or Medicare. Nor would it affect the regular federal budget, with its cash reckoning of revenue, expenditure, and – nowadays, anyway – large deficits.

The proposal would, however, change the "financial statement" of the government, a Treasury document that's obscure even to some outside budget experts. The latest balance sheet, for fiscal 2005, finds US government liabilities exceeded assets by $8.5 trillion. (That's a big number: A trillion is a thousand billions.) The biggest liabilities include federal debt held by the public and benefits payable to federal employees and veterans – together, they add up to $9.1 trillion.

By comparison, social insurance liabilities were a "mere" $93 billion. The proposal by six independent members of the FASAB, a majority of the board, would radically raise that figure.

At present, a government liability (such as a Social Security pension) arises in bookkeeping terms only when the benefit amount is "due and payable." The six argue that an "expense is incurred and a liability arises when participants substantially meet eligibility requirements during their working lives." For instance, when a worker has paid Social Security payroll taxes for 40 quarters, he or she becomes eligible for a pension. The accrual date for the pension cost advances by decades, adding to federal liabilities.

Three government members on the FASAB, representing the Treasury, the White House, and the Government Accountability Office, want to stick to the present accounting system.

The split seems odd. Privatization enthusiasts often cite the largest liability figure possible, hoping to galvanize the public to support drastic reform. One enthusiast, Jagadeesh Gokhale, an economist at the pro-privatization CATO Institute in Washington, D.C., cowrote a 2005 academic paper that concludes that the Social Security system had an unfunded obligation of $10.4 trillion.

But it appears that the government representatives don't want to indicate that Uncle Sam has that large of a contractual obligation into the future.

Citing huge federal liabilities, Laurence Kotlikoff, an economist at Boston University, says the US is "broke" and that most reform suggestions are like the tailors of the emperor of legend discussing what buttons to put on his magnificent but invisible new cloak.

Mr. Kotlikoff proposes a governmental "Personal Security System" to replace the employer-based retirement system, now in "shambles."

Another expert, Dean Baker of the Center for Economic Policy and Research, says many of the multitrillion-dollar liability numbers for Social Security are aimed at "scaring people" to make privatization more politically feasible – "give them a Halloween mask."

The FASAB's accounting-change proposal, he says, would not be useful in helping people understand the finances of federal social insurance programs.

As Dr. Baker sees it, the real budget problem is rising healthcare costs – not Social Security. And the multitrillion-dollar liability numbers rely on assumptions, sometimes into infinity, that are basically "a huge amount of guesswork."

"These programs are inadequately funded," says Alicia Munnell, director of the Center for Retirement Research at Boston College. But the huge liability numbers are "stupid" because they don't account for economic growth.

In relation to future gross domestic product, the Social Security liability gap is only 2 percentage points. That gap, she says, could be closed preferably by raising taxes.

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