All other things being equal, that's surely a good idea. However, all other things aren't equal.
In the first place, a typical budget lasts only one year. What about all those years beyond the initial twelve month budgeting period? And what would be the enforcement mechanism? The Congress?
In other words, what about instead accounting properly for all those future promises and underfunded liabilities that won't come due next year but will come due in the years thereafter? And then addressing each year by budgeting annual outlays in a straightforward manner, including the need to fully fund those future liabilities?
In other words, America has made financial commitments that will last longer than the next twelve months or even twelve years, for that matter. Why don't we admit that simple fact in our government budgeting and accounting records and projections? That would be the honest thing to do.
But setting aside the future liabilities and their honest funding for now, the role of tax increases, if any, to achieve a balanced budget is also a fundamental item of importance in our quest to restore fiscal sanity.
Accordingly, achieving a balanced budget by tax increases will impact future economic growth in a negative and different way than spending decreases will.
Again, it's the short versus long term political issue coming to the fore again.
Let's take the high road and look at the long term issue.
In tongue and cheek fashion, an actuary is often described as an accountant without a personality. What actuaries actually do, however, is an essential part of sound financial management. They assess the financial impact of future risk and uncertainty and its impact on future taxpayers.
We'll use a simple case of social security as an example, although medicare, medicaid, FHA loan guarantees, postal service operations, GM loans, Amtrak and other similar examples would apply as well.
If the government promises person 'A' of age 25 a $200 weekly retirement benefit upon completing his working career, reaching age 66 and lasting until his death, someone will have to come up with the necessary money to pay that retirement benefit commencing in 2052.
Common sense says that sufficient money should be put aside during A's working life in order to make sure that the full retirement benefit can be paid.
Now expand A to include the entire U.S. work force of considerably more than one hundred million people. And include the money required in order to meet the needs of medicare promises and probable nursing home care costs and benefits, too.
Next factor in that some of those one hundred million plus persons will stop working or die before reaching age 66, some will live until 70-80-90, some until 100, some will get very sick early, some will remain healthy until the end, some will live out their lives in nursing homes, some will earn more than others during their working careers, some will have their spousal benefits kick in because their spouse outlives them, some won't--and so on.
Actuaries take all these possibilities into account, including future inflation estimates and assumed investment rates of return, and use these estimates to predict the eventual cost associated with these future promised benefits.
Of course, actuaries don't pay the benefits. Nor do they invest the money contributed in order for the benefits to be paid. Workers, taxpayers and investment managers do that.
In private sector pension plans, money received as contributions from the company or worker is invested during A's remaining forty one working years in order to pay in full the promised benefits upon A's retirement.
In contrast, the government's accounting doesn't legitimately acknowledge, let alone fund, these future liabilities using its misleading cash accounting methodology.
Thus, no tax dollars are raised for social security investment purposes. None of A's individual contributions are invested either. Those payments obligations for A are left to future taxpayers, and that's unfair to all concerned.
Accordingly, my recommendation would be for Speaker Boehner to introduce an accounting and funding methodology which is truthful and complete.
Then if the Republicans and Democrats want to balance the budget while funding the promised future benefits at the same time, that would be nice, too.
But let's do first things first. Tell us how much we owe and must pay each year in order to achieve both a balanced annual budget and well funded benefit plans for the future.
Then we can decide about the proper level of taxes, benefits, contributions and such. But not until then.
The same longer term actuarial process should be followed in determining how to pay for future medical costs, nursing home costs, Amtrak losses, postal service deficits and defaults on home loan guarantees from FHA, Fannie and Freddie, as examples.
The common thread is that the cost of the future promised payment needs to recognized when the promise is made, even though the payment won't occur until later.
To repeat, unlike cash accounting, accrual accounting sets up the liability when it's known and doesn't wait until the cash payment is made.
The Balanced-Budget Backfire discusses the phoniness surrounding the Republicans' latest attempt to pass a balanced budget amendment in the House.
It references giving politicians an excuse to raise taxes in order to balance the budget:
"As self-defeating sideshows go, few compare to the Republican obsession with a balanced-budget amendment. And here we go again.
As early as today, the House GOP plans to begin debate on a balanced-budget amendment to the Constitution, a vote Democrats agreed to as part of the August debt-ceiling deal. But, lo, they will not debate an amendment that would require a two-thirds supermajority to raise taxes and cap spending eventually at 18% of GDP. . . .
Instead, House Speaker John Boehner plans to offer a vanilla amendment that merely calls for a balanced budget, with no spending limitation or supermajority tax requirements. . . .
And even if it did become the law of the land, the amendment could easily become an engine for tax increases, as it so often has in the 50 states. Under Mr. Boehner's amendment, spending could rise to 25% or 30% or more of GDP, so long as the budget is balanced. This is a recipe for politicians to tell voters that taxes must go up because the Constitution made them do it."
If the politicians want to do something truly meaningful on behalf of taxpayers, they can simply adopt the accrual method of accounting in place of the current cash method.
In other words, we should tell the full and complete truth. Promising a benefit to be paid some years from now has a real present cost associated with it. It's not free, and it must not remain invisible.
But don't count on it happening anytime soon. The politicians wouldn't feel anything but pain if the accrual method were adopted. How sad.
Thanks. Bob.
No comments:
Post a Comment