Bad accounting hurts social security

If the federal budget was prepared according to Generally Accepted Accounting Principles – what accountants call GAAP – then the budget would show a deficit, not a surplus. Unfortunately the government uses Cleverly Rigged Accounting Ploys to achieve a surplus when one really doesn’t exist.

Pay attention.

The public better pay attention to these arcane procedures before the government strips them of whatever future dreams and hopes they have.

Unless significant reforms are undertaken soon, a major consequence of these budget deceptions is that Social Security will be unable to pay retirees any benefits in 15 or so years.

In fact, it is because of these accounting lies that I tell friends, students, and clients that they ought to assume that Social Security will not exist when they retire.

If you want to reform Social Security, you must eliminate the legerdemain practiced by Washington bureaucrats.

Double counting.

The first thing that the bureaucrats do is to double count the money. When you pay your FICA taxes, the government correctly counts that as income into the Social Security fund.

Then Washington moves the money out of Social Security and into the general fund. When they do this, they also count the funds as income. But, this is the same money as before, thus it is counted twice as income.

Secondly, Washington counts interfund transfers as income when they aren’t. Think of an individual who has a savings account with $10,000 and a checking account with $2,000.

Only a transfer.

If this person transfers $5,000 from savings into checking, is he any better off? Of course not. The transfer is not the collection of new money – just a redeployment of where the funds are kept.

This leads us to the third deceit. If you want to know how the federal budget is doing overall, you ought to consolidate the accounts. In the above example the individual has $12,000 overall, both before and after the transfer.

Raiding Social Security.

By not consolidating the various budget funds, Washington can say that the general fund has more money. What the government is not revealing, however, is that the Social Security fund has been raided.

Finally, if a transfer of money from one governmental fund to another is income to the receiving fund, then logically the transfer should be recorded as an expense to the giving fund.

Federal accountants avoid this because they don’t want to say that Social Security is having a problem.

Think of it this way.

If I can transfer funds from one account to another and it is income to the receiving fund, but not an expense to the giving fund, then we can have budget surpluses of any amount we wish.

In any given day, let’s transfer say $10 billion from Social Security into the general fund and then transfer it back. That adds $10 billion to both funds.

Let’s do this again; in fact, let’s do this 100 times. In one day we can have a trillion dollar surplus in both funds. Of course, Washington doesn’t do this because multiple transfers would easily disclose the charade.

Approximately $1 trillion has been transferred from Social Security into the general fund and another $1 trillion has been transferred from all of the other funds into the general fund.

This means that $2 trillion has been double counted as income under this system of “unified budgeting.”

Implications.

The implication is that it will take $2 trillion for the general fund to repay these various funds. Even if the economy does very well in the future, a lot of taxes and levies will have to come in so that these debts are paid. And this isn’t even considering the national debt.

The public seems to think that Social Security is awash with funds from the payroll taxes that people pay. Instead, the general fund has raided and continues to raid Social Security.

The fund has a $1 trillion receivable from the general fund, and this amount is growing. In 15-20 years this receivable likely will become a really large number.

Consequences.

The most critical consequence of these accounting lies is that the receivable likely will not be collectible.

At that point, the citizens will realize that they have been taken by the very ones who should be looking out for our interests.

The game that I have just described became legal in 1974 under President Nixon and has been played by every president since.

Because of the consequences, individuals need to address the problem and take steps to protect themselves.

What can you do?

The first thing I advise is not to rely on Social Security. Build up your own retirement accounts, for you might be forced to depend on them alone.

The next thing I recommend is to write, call, or e-mail Congress. Insist that “unified budgeting” be repealed. It’s hard to improve things if you don’t have truthful numbers reported.

The final thing is to insist that the general fund repay Social Security. That would require both parties to reduce or eliminate the tax cut so the funds are available to pay off the receivable to Social Security and to reduce the pork barrel spending.

Both parties got us into this mess; it will take heroic, bipartisan efforts to get us out of it.

Affects us all.

Accounting issues may be uninteresting to the masses, but in this case they have deleterious effects. We need to take actions now to alleviate this problem.

Fifteen years from now the disease might be too advanced to cure.

(J. Edward Ketz is associate professor of accounting in Penn State’s Smeal College of Business Administration.)