By Allan Sloan
Tuesday, January 13 1998; Page D03

To most of us, mid-January means wintertime. But to the denizens of Washington, this is budget time, a season that produces enough leaks about federal budget proposals to float a fleet of financial frigates.

This year, as you know if you've picked up a newspaper or watched a TV news show, we're hearing an unfamiliar word: surplus. We're being assured that the first balanced federal budget since 1969 is almost upon us. Instead of deficits as far as the eye can see, the Congressional Budget Office now projects surpluses. So instead of our normal gloomy talk about how to handle deficits, we're on to happier things: how to spend surpluses. All sorts of trial balloons are flying around. What fun.

But get a grip. There is no surplus. If you do the math the normal way instead of Uncle Sam's way, there's nothing resembling a budget surplus on the horizon. How can I say this when President Clinton, House Speaker Newt Gingrich and big-time budget techies are talking up surpluses? Because they're using federal budget accounting and I'm using real-world accounting.

Virtually the entire difference between fedmath and real-world math involves Social Security's retirement and disability funds, whose huge and growing surpluses are masking the deficit in the rest of the budget. By fedmath, the deficit for fiscal 1997, which ended Sept. 30, was $22.6 billion -- little more than a rounding error in a $1.6 trillion budget. But by real-world math the deficit is $103.9 billion. Even these days, that's still a lot of money.

Let me explain. If the government were a private company, the operations of its retirement system would be totally separate from its business operations. That's as it should be, because the retirement money is earmarked for retirees, not for company shareholders. For instance, when my employer, The Washington Post Co., reports financial results, it doesn't include the operations of its retirement plans, which take in more money than they pay out. Nor should it, because the company can't just swoop down and scarf up that money if it's feeling a little short of cash.

Contrast this with the way Uncle Sam keeps books for Social Security. All of the taxes that Social Security collects count as general government revenue, and all of the benefits it pays (plus administrative costs) count as general expenses. In fiscal 1997, the system took in $40.1 billion more than it paid out. That operating profit, as it were, held down the federal deficit -- even though the $40.1 billion is held in the Social Security trust fund, has been promised to current and future beneficiaries, and can't be spent for general purposes.

And wait -- there's another delightful wrinkle. The trust fund owns hundreds of billions of dollars of Treasury securities, on which it earns interest. The Treasury paid $41.2 billion in interest on the fund's holdings last year. But to the bean counters, this money wasn't an interest expense chargeable to the budget -- which would add to the deficit and undercut all this happy Beltway blather about having a surplus.

Instead, the interest from the Treasury to the trust fund was considered a transfer from one part of the government to another. Therefore it didn't count as an expense. That makes the deficit seem smaller than it really is. Pretty slick.

Lest you think I'm part of the black-helicopter crowd that sees government plots everywhere, let me hasten to assure you that I believe what lots of people tell me: that today's problem was yesterday's perfectly innocent reform. In 1968 the feds adopted the so-called unified budget, which includes Social Security, the Postal Service and various other things. (Of these, only Social Security is big enough to matter.) Until then, these items were "off budget." The idea of putting them into the budget was for the budget to more accurately reflect whether Uncle Sam was taking in more money than he spent.

"I really think it was mostly a technical change," says former Congressional Budget Office director Robert Reischauer, now at the Brookings Institution. "There was never an obvious intent to use Social Security to reduce stated deficits."

The big distortions started in the mid-1980s, when money from sharply higher Social Security taxes began flooding into the Treasury and skewing the budget numbers. This distortion is something that everybody involved in budget deliberations knows and talks about privately. But who wants to run around in public prescribing castor oil when you can offer cotton candy?

To be fair, the government has made enormous progress cutting the deficit in the past five years. But to paraphrase Gene Sperling, White House economic policy adviser, just because you've dieted for years and have gotten close to your ideal weight, it doesn't mean you should go out and have pizza every night.

Allan Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com. Newsweek's Rich Thomas contributed to this column from Washington.