By Allan Sloan
Tuesday, May 13 1997; Page D03

It's been party time in Washington lately, with President Clinton and Congress toasting their agreement to agree to balance the federal budget in five years. There's been so much celebrating that you expect to see Capitol Hill and the White House grounds littered with balloons and empty champagne bottles.

Sorry to be the skunk at the garden party, folks. But if the federal government did things the way a business does, no one would be talking about having balanced the budget in fiscal year 2002. Rather, we'd be talking about how far we still have to go to close the gap between what the federal government takes in and what it spends.

Don't get me wrong. I'm not dissing the agreement, shaky though it is. A balanced budget would be a magnificent achievement. But even if all the good things assumed in the tentative budget agreement actually come to pass – no recession, buoyant employment, declining interest rates – the budget still wouldn't be close to balanced if Uncle Sam kept his books in the conventional way.

What I'm talking about is the way the federal budget handles Social Security – to be specific, the Social Security retirement and disability programs. Every budget junkie knows the things I'm about to tell you, but it tends to make the eyes of normal people glaze over. Please try to stay awake, because we're talking major bucks here.

Let me explain. Most people think that there's a separate Social Security trust fund into which the government deposits the payroll taxes that we and our employers pay, plus the income tax that some high-income retirees pay on their Social Security retirement benefits. Wrong. That's the way a truly separate trust fund would work. That's the way the system should work. But it's not the way it does work. Instead, the government counts all the Social Security payroll tax and income tax money that it takes in as revenue and counts the checks it sends to retirees and disability recipients as an expense.

The effect? Social Security cuts the federal deficit about $35 billion a year.

But even more significant, the government doesn't count as an expense the huge and growing interest payments it pays the Social Security trust fund. That interest is money the government is pledging to future Social Security recipients, but that doesn't count as an expense in the federal budget. If a separate trust fund actually existed, that interest would be called an expense. Instead, because the fund is merely an account at the Treasury, the interest is considered money that the government shifts from one pocket to another. And therefore not an expense.

You still with me? Good. Run your eyes over the table that accompanies this article. You see that the total distortion to the budget is about $78 billion this year and will be about $104 billion in the fiscal year that ends Sept. 30, 2002. That's when the budget is supposed to be in balance. But take out Social Security and we're still 12 digits in the red.

If any business handled its pension fund this way, someone would probably end up in the slammer. Newsweek puts my retirement money into a pension fund held by an outside firm. Cash only, please; Newsweek can't pay the fund with IOUs. And if Newsweek tried to take the fund's cash and replace it with IOUs, pension regulators would go nuts. But Uncle Sam happily uses about $35 billion from Social Security to pay its bills and replaces it with IOUs. And it pays interest on the IOUs by giving the fund more IOUs. And it doesn't count them as an expense.

The way Social Security is handled, "the government gets to spend the same money twice," said Susan Tanaka, vice president of the Committee for a Responsible Federal Budget. "The government spends the money to meet current expenses, and tells the people who are paying the taxes that they will get benefits in the future."

"Social Security masks the deficit," said Ari Fleischer, a spokesman for the House Ways and Means Committee. Fleischer, who rightly calls the agreement "a major achievement," said the goal is for the budget to run a surplus at least equal to the Social Security distortions. So there you have it. There's no space today to talk about the implications of this stuff. Or why the books are kept this way. Or why we're heading for a major problem with Social Security in about 20 years. For now, give the budgeteers one cheer. And hold the other two until they finish the job.

Allan Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com. Rick Thomas of Newsweek contributed to this report.