In recent years we have been subjected to a rising cacophony of nonsense about a looming financial crisis. No, we are not referring to the current, very real, meltdown of private financial markets. Rather, we are told, future unfunded entitlements will bankrupt our government as the baby boomers retire. Social Security and Medicare are the main source of what former Comptroller General David Walker has called the “super subprime crisis.”
Social Security and Medicare have always had enemies, closely allied to private insurance companies who would like the business, and to fund managers and others who would profit from privatization of the associated revenue streams. But recently, these enemies have been given a boost, and a claim to respectability, by the creation of “intergenerational accounting,” an economic method that purports to calculate the debt burden our generation will leave for future generations. This Policy Note assesses intergenerational accounting and related aspects of what we call “the accounting campaign against Social Security and Medicare.”
In intergenerational accounting, federal government revenue and expenditure streams are compared over very long periods—even over infinite time. “Deficit gaps” are then used to measure the financial burden of these commitments, and therefore the alleged solvency or insolvency of the government. Discounting the sum of the differences back to the present permits infinite sums to be translated into very large, but finite numbers. The results, amounting to tens of trillions of dollars, are headline-grabbing and scary-looking. Evidently this combination makes them irresistible. Even the Board of Trustees of the Social Security Administration began ago to dabble in such arithmetic several years ago.
Now the Federal Accounting Standards Board (FASAB) is proposing to subject the entire federal budget to such accounting. It has issued two “exposure drafts” entitled “Comprehensive Long-Term Projections for the U.S. Government” and “Accounting for Social Insurance, Revised,” and is soliciting comments on its recommendations. In this Policy Note, we argue that these proposals are not only wrongheaded, but dangerous. We examine the purpose of budgeting at the federal government level, and explain why government should not be subject to the same sort of accounting and financial constraints that apply to private households or business firms. That is, we explain what is different about the federal government. This leads to a critique of the FASAB proposals. We conclude that intergenerational accounting should play no role in federal government budgeting.