Accounting for Social Security and its Reform

How well did the Social Security system do last year? According to the most recent annual report prepared by system's Board of Trustees, the Social Security trust funds showed a $165.4 billion net increase in assets in 2002 and reported accumulated reserves of nearly $1.4 trillion by year end. Unfortunately, these glowing reports are a cash-flow illusion, revealing only the difference between the system's annual cash receipts and its yearly payments for benefits and administrative expenses. Were the finances of the Social Security system restated under principles of accrual accounting, which recognizes commitments to make future payments when those obligations are actually incurred, the Social Security trust funds would have had to report a loss of several hundred billion dollars in 2002. Moreover, as of December 31, 2002, an accrual-based balance sheet of the Social Security system would have revealed more than $14.0 trillion of accrued liabilities to Social Security participants and beneficiaries. Even allowing for the system's $1.4 trillion of accumulated reserves as well as the value of excess future taxes to be paid by current participants over the rest of their working lives, the Social Security trust funds had unfunded obligations on the order of $10.5 trillion as of year-end 2002. This implicit debt of the Social Security system is several times greater than the explicit debt burden of the federal government and is growing by hundreds of billions of dollars each year. In addition to misrepresenting the magnitude of the Social Security system's looming financial crisis, the current accounting system for Social Security distorts public debate over Social Security reform proposals and confuses the relationship between Social Security and the rest of the federal budget. Accrual accounting, in contrast, would provide a clearer picture of the true state of the Social Security's current financial shortfall and the extent to which the system's burden on future generations is increasing each year. Accrual accounting would also create political incentives for our leaders to address Social Security's difficulties in a timely manner, and enhance the quality of public debate over the relative merits of competing reform proposals