Accounting For The Costs of Ageing

by Edward Hugh

This article which appears in todays FT seems to me to raise issues which are extremely important, indeed it gets to the heart of the matter:

A radical new approach to government accounting that would require the US administration to account for the cost of future social security payments year by year as people build up entitlements will be proposed on Monday.

The proposal by the federal accounting standards advisory board (FASAB) – which would also require the government to account for benefits accrued under Medicare and other social insurance programmes in the same way – is unprecedented internationally. It would radically change the presentation of US government finances, in effect bringing forward the cost of rapidly increasing social security and Medicare obligations and greatly increasing the reported fiscal deficit.

As the FT notes the proposal is unprecedented internationally, but is exactly what is needed. Assessing sustainability in public finances involves having relatively accurate knowledge of two things: accumulated liabilities, and future rates of economic growth. The 'unprecedented' component in the FASB proposals would go a long way towards improving the situation vis-a-vis the first item, the second one, of course, still needs a lot of thought and work.

The FT has obtained a copy of the FASAB preliminary views paper which will be released on Monday. In it, the independent board majority argues that “for social insurance programmes an expense is incurred and a liability arises when participants substantially meet eligibility requirements during their working lives”.

By contrast, the government representatives argue that the liability arises only when the benefit amount is “due and payable” as under current accounting rules.

The majority independent directors want the government to start providing for the future cost of social security and other benefits when workers become fully insured after 10 years in covered employment.

They say the current arrangement is “flawed” because it “fails . . . to recognise the accruing cost of social insurance programmes in each reporting period”.

Adopting the proposed new rule would bring the government more into line with the private sector, an approach that has considerable support within a section of the Republican party and may in this instance be of interest to Democrats too.

However, it would break with international public accounting practice, which essentially treats social insurance offered by sovereign governments as a political commitment to pay future benefits rather than a financial liability.

The Organisation for Economic Co-operation and Development has written to the FASAB saying it is “very concerned” about the proposed rule change.

The letter, signed by Barry Anderson, head of the OECD’s budgeting and public expenditures division, says that “classifying these transactions the same as private sector liabilities is wrong” and could confuse the public.