April 20, 2014

The Case Of The Missing Liability

Volume VI, Number 11
December 21, 2000

SSA recently released its FY 2000 financial statement, or "Performance and Accountability Report." The report is the first to reflect new federal accounting rules, years in the making, that are supposed to ensure a more complete and accurate presentation of the government's long-term financial commitments. Yet incredibly, missing from the report is any acknowledgment of Social Security's $9 trillion unfunded liability. This liability represents the subsidy that today's Social Security participants are expecting from future generations. It is obviously relevant to Social Security's financial outlook--and indeed, as originally drafted by the Federal Accounting Standards Advisory Board, the new rules would have required SSA and Treasury to disclose it. The requirement was dropped at the insistence of the administration, which doesn't want the public to focus on the liability number.

Great Practical Significance

Let's start with some definitions. Social Security's unfunded liability can be calculated two ways--as a "termination" or a "closed group" liability. The first equals the present value of benefits that have already accrued to current participants minus existing trust-fund assets. It is the number that would ordinarily appear on the balance sheet of a private pension plan. The second extends the calculation to include all benefits that are projected to accrue to current participants. Both liability calculations quantify Social Security's lien on the future-and both work out to roughly $9 trillion. The administration says this measure is meaningless in a pay-as-you-go system, and that all that matters is Social Security's (much smaller) actuarial deficit. But it is the administration's measure that is meaningless. Actuarial balance--that is, the difference between total benefits and total taxes over the next seventy-five years--counts trillions of dollars in future tax contributions as government assets while failing to count trillions of dollars in future benefits "earned" by those contributions, but payable beyond the Trustees' time horizon, as government liabilities. It says nothing about Social Security's financial position--nor indeed, its sustainability. Social Security's unfunded liability, on the other hand, has great practical significance. First, it gives some idea of the system's impact on private saving, and hence on living standards. Because Social Security promises households future benefits, but doesn't set aside real resources that can generate that income, Americans put less into fully funded forms of savings. Second, it indicates the extent to which future generations will fail to get their money's worth from Social Security. Finally, it measures the cost of transitioning to a funded system. Social Security's unfunded liability is the debt future generations must liquidate before they can invest their own contributions free and clear.

A Fundamental Contradiction

In the end, the administration's argument boils down to one dubious assertion: Because government can alter or even cancel promised Social Security benefits, these benefits cannot be considered a liability. It is true that Social Security is a legislated entitlement, not a contract. But its contributory nature, its permanent appropriation, and its immense popularity have always given it a special protected status. Does anyone seriously doubt that Social Security's unfunded benefit promises constitute some sort of government obligation? There's a fundamental contradiction in the administration's position. If it really believes that there is no Social Security liability, why does it endorse terminology--such as "trust funds" and "insured status" and "earned benefits"--that imply Social Security is a property right? When arguing its case to the experts, the administration stresses that Social Security benefits can be abrogated at any time. When talking to the public, it insists that Social Security is a sacred contract. A constructive debate depends on honest arguments and honest numbers. It's time to stop the double-talk and focus on the facts..