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Allan Sloan

There's No Accounting for the New Social Security Plan

By Allan Sloan
Tuesday, December 14, 2004; Page E03

One of the reasons that an outsider like me has so much fun writing about Washington is that the politicians in our nation's capital talk one way but act another. They want corporations to provide the public with numbers that bear some resemblance to reality, but they've never bothered to clean up their own budget numbers.

The federal budget is a bizarre mess, with unique bookkeeping practices that make it almost impossible for an outsider -- or even most insiders -- to figure out what's really going on. If corporations produced numbers like these, jail cells would be filled with CEOs. But Washington doesn't impose laws like Sarbanes-Oxley reform legislation on itself. It does whatever it wants.

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So I love the debate about proposals to "reform" federal budget accounting to ignore the impact of proposed Social Security personal accounts. As you know, the argument is that letting people set up personal accounts is actually a federal investment, not an expense, because the accounts let government save money in the long run by reducing future Social Security expenditures.

If the rest of the government actually reported its finances in a reasonable and honest way, I'd be sympathetic to this argument, even though I'm no fan of individual accounts as currently proposed. But I see no signs of incipient intellectual budget honesty emerging. Instead, the push is on to make the deficit look smaller whether or not it really is smaller. And I see no reason to exclude the added borrowing that would be caused by personal accounts, while at the same time allowing the government to confiscate the existing Social Security surplus to make the rest of the budget look better.

Here are the numbers. In fiscal 2004, which ended in September, Social Security took in $155 billion more than it spent -- $69 billion in cash, which the Treasury took in return for issuing $69 billion of new Treasury IOUs, and $86 billion in interest on its trust fund, paid by the Treasury with new IOUs. Even though Social Security is theoretically "off-budget," this surplus was subtracted from the deficit run up by the rest of the government. Hence we have a reported deficit of $413 billion rather than $568 billion.

Even though the Treasury ended up owing the Social Security trust fund $155 billion more than it did 12 months earlier, that obligation isn't reflected in the so-called "unified budget," and no one except a few cranks like me thinks it mattered any.

And wait, it gets worse. The Treasury owes about $2 trillion to so-called "on-budget trust funds," such as federal civilian and military employee retirement accounts. In fiscal 2004, it paid $68 billion of interest to these trust funds by giving them new Treasury securities. The Treasury showed a $68 billion interest expense, and the funds showed $68 billion of revenue. Net effect of the government's newly issued IOUs on the deficit: zero. The government's obligations are $68 billion more than they were, but that didn't show up in the deficit.

In any sort of reasonably honest bookkeeping system, that $223 billion -- the $155 billion to the Social Security trust fund and the $68 billion to the on-budget trust funds -- would have been reflected in the deficit figures, because those IOUs increase the government's obligations. Issuing Treasury IOUs to the trust funds is the functional equivalent of selling $223 billion of Treasury IOUs to investors and depositing cash in the trust funds. But selling bonds and making cash expenditures is considered an expense, while using bonds in lieu of cash isn't an expense. It's ludicrous.

This brings us back to personal Social Security accounts. Every dollar that goes into those accounts rather than into the Treasury is an extra dollar that Uncle Sam has to borrow. So if we're going to keep up cash accounting for the government, let's be consistent. If you want to consider personal accounts as an investment that doesn't increase the deficit, you have to treat the Treasury IOUs issued to federal trust funds as an expense and add them to the deficit. Then taxpayers will have an idea of what's really going on.

I'm not holding my breath until this happens, though. Washington, after all, is the land of do as I say. Do as I do? That's not for the government, just for us suckers out in the hinterlands who pay the bills.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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