The United States government has established programs it calls “entitlements.” Two of the largest are Social Security and Medicare. Individuals gain a legal right to entitlement benefits if they meet program requirements.
·The government currently spends massive amounts of money in its entitlement programs.
The federal government’s most recent income statement included $1.8 trillion in spending for the Social Security Administration and the Department of Health and Human Services. These two departments are responsible for three of the largest entitlement programs – Social Security, Medicare, and Medicaid. Spending reported on those two line items amounted to nearly half of all reported federal spending.
·The government calls these programs “entitlements,” but the government accounts for the programs as if citizens are not entitled to the benefits advertised.
o The government reports spending in these programs in its income statement on a “cash” basis. Accrual accounting principles would include growing unfunded future benefits as expenditures, but the federal government does not do this. In turn, on the balance sheet, the government excludes unfunded future benefit payments from its liabilities.
·The reason the government says that it doesn’t have to include future unfunded “entitlement” benefits in its reported liabilities is that the government can change the law when it wants to.
o The government includes only a small sliver of future entitlement spending obligations on its balance sheet – the benefits that are “currently due and payable.” In 2013, the latest year available, that small sliver amounted to about $170 billion – just a tiny slice of the present value of unfunded future benefits slated to be paid under current law.
o How can the government justify reporting such a “small” amount? Because, as government representatives have testified, the government can change the law on us at any time. Under the accounting standards it sets for itself, the government chooses to report only the “present obligation.”
This accounting is false, and lies at odds with accounting principles established for the private sector.
·The government massively overstates its income, and understates its debt, by excluding growth in unfunded entitlement obligations from its income statement and balance sheet.
o Last year, the government reported $3.1 trillion in total revenue, and $3.9 trillion in expenses, for a net loss of $0.8 trillion. Including growth in unfunded future entitlement spending as expenditures, expenses would rise from the reported $3.9 trillion to $6.5 trillion, and the net loss would mushroom from $0.8 trillion to $3.4 trillion.
o In turn, the federal government’s balance sheet last year showed $3 trillion in assets $20 trillion in liabilities, for a (negative) net position of $17 trillion. Adding unfunded Social Security and Medicare benefits would hike the liabilities from $20 trillion to $87 trillion, and the net position would drop from a negative $17 trillion to a negative $84 trillion.
·The reason the federal government cites for excluding future entitlement obligations from its reported liabilities lies at odds with the accounting that the government imposes on the private sector.
o The accounting principles the government establishes for the private sector define a liability in part as a “probable future sacrifice of economic resources.” The government adopts a looser definition for itself, and only reports the “present obligations.”
o The dishonesty of this accounting is reinforced by the impression left when the government reports “entitlement” programs in the “mandatory,” not “discretionary,” section of the budget.
Future entitlement benefits are at risk, given the funding status of these programs.
·A bird in the hand is worth two in the bush – and Social Security and Medicare birds may fly away in the future.
o The government has massively underfunded its “entitlement” programs, in light of looming demographic developments.
o How truly underfunded they are depend on your assumptions, including uncertain assumptions about future trends in health care costs. But even optimistic assumptions leave you with a massive hole.
o Financial theory and common sense, including the saying “a bird in the hand is worth two in the bush,” counsels discounting for expected but uncertain future dollars.
o The amounts the government tells us to expect on our Social Security statements may be worth more than the paper they are printed on, but they are not worth what the government estimates for us.