Privatizing Social Security

Studies | Social Security

No. 217
Wednesday, July 01, 1998
by Laurence J. Kotlikoff


How Did Things Get So Bad?

The answer, in part, is that we are keeping a set of books that systematically ignore the future and encourage us to think we are doing better when we are actually doing worse. I'm referring to deficit accounting, which records as government debt only those obligations we decide to officially recognize. Obligations that are no less real - like paying baby boomers their promised Social Security benefits - are completely omitted. Unfortunately, our unofficial obligations exceed our official ones by a factor of roughly three. Moreover, these unofficial obligations have been growing rapidly even as growth of the official ones has slowed.

"Under deficit accounting, government records as debt only those obligations it decides to officially recognize - about a third of the real
total."

Failures of deficit accounting. Take the first term of the Clinton administration, during which the official deficit shrank relative to the size of the economy. At the same time this was happening, the administration and Congress permitted real Medicare benefits per beneficiary to grow by one-quarter. In so doing, it raised not just the immediate real benefit levels of the elderly, but also the benefits of the baby boom generation that is soon to retire. Why? Because the government never has reined in the growth of Medicare benefits, let alone cut them in absolute terms. So in giving current beneficiaries a real Medicare increase of 25 percent, the government effectively made this increase permanent. The fiscal consequences are horrendous. The government allowed a multi-trillion-dollar unfunded liability to grow by 25 percent in just four years! Had the government been forced to record the growth of this liability, it would have reported huge and rapidly growing deficits relative to GDP.

In addition to being based on an economically arbitrary definition of debt, deficit accounting focuses only on the short term. For example, the recent budget agreement sought to achieve "budget balance" by 2002. How did the Republican leadership in Congress, which apparently chose that date, decide that we needed to think only about the next few years? It was not, I'd suggest, the result of their thinking about the fate of their children and grandchildren.

Potential benefits of generational accounting. Fortunately, there is a good alternative to deficit accounting that considers all government liabilities on an even footing and looks at the future without blinders. This alternative, generational accounting, is being used by 27 countries from Chile to Norway and Japan to Israel. Among the governments and multilateral economic institutions using generational accounting techniques are the Bank of England, the Bank of Japan, the Finance Ministry of Norway, the Treasury of New Zealand, the International Monetary Fund, the World Bank and the European Union. In the United States, Congress remains largely oblivious to the existence of generational accounting, and the Clinton administration finds it embarrassing. Indeed, the administration's top "economist" - Gene Sperling - overruled the Office of Management and Budget and removed it from the federal budget.


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