Peter A. Diamond[*]
Peter R. Orszag[**]
Professor Jackson’s article[1] represents a thoughtful piece of analysis. Regardless of what conclusions one reaches regarding his principal suggestions, his article raises important objections to the current system of accounting for Social Security and deserves careful study by Social Security and budget experts.
Jackson embraces the use of accrual accounting as the primary metric for evaluating Social Security’s finances for both Social Security reform discussions and annual federal budgeting. Accrual accounting measures, which are already available to experts, would be a useful addition to the information provided regularly to the public and should be more easily available and more widely cited. They should not, however, replace the central measures now used in policy discussions. Including accrual measures of Social Security in the annual federal budget could cause small changes in assumptions to generate very large changes in budget outcomes. The resultant political pressure to alter projection assumptions would pose serious risks to the perceived legitimacy of the actuarial projections.
Jackson describes different accounting measures for the financial position of Social Security, and argues for making two of them central in popular and political discussions of Social Security and the federal budget. He also argues that the structure of a Social Security reform plan should reflect these preferred public accounting measures. Jackson’s proposals would represent a far-reaching revision of federal accounting, and the opportunity to explore all its possible ramifications are beyond the scope
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of this Comment. This Comment therefore merely describes first reactions to some of Jackson’s key points.
A great deal of information is available to interested experts about the current and projected financial position of Social Security.[2] Analysts are well aware of the different measures and can consider how any reform of the system would affect them. Jackson reviews these measures and effectively introduces a new measure by emphasizing the annual change in one of them. Before turning to the specific measure that Jackson embraces, it is worth noting that most of the alternative measures of Social Security’s financial position are not easily accessible to the public. Jackson’s suggestion that these measures be included in the most visible public reports is compelling; our disagreement focuses on whether any of these alternative measures should serve as the focal point for reform discussions.
Analysts have previously calculated the maximum transition cost, which reflects the cost of all accrued benefits to date minus the existing Trust Fund. Jackson calculates the annual changein this maximum transition cost, which no one to our knowledge had previously computed.[3] Jackson’s calculation provides a measure of the growth in accrued benefits, adjusted for the realized cash flow experienced during the year.
The change in the maximum transition cost provides one way of measuring the cost of delaying reform. Analysts regularly argue that a delay in addressing the actuarial imbalance makes the problem more difficult to address—that the passage of time locks in place more of the benefits that could be reduced and forgoes more of the earnings that could be subject to higher taxation. Typically, analysts illustrate this point by highlighting the larger steps necessary to achieve any given definition of long-term balance if action were delayed. In 2001, The Social Security Advisory Board, for example, noted,
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A reduction in replacement rates of about 5 percent beginning with individuals newly eligible in 2002 would solve 33 percent of the long-range financing problem. If a benefit formula change is delayed until 2020, the ultimate reduction in replacement rates would have to be larger, about 8 percent, to have the same impact on the long-range (75-year) actuarial deficit. By waiting until 2020, a larger reduction is needed because it applies for fewer years.[4]
Jackson’s change in the maximum transition cost offers an alternative lens through which to quantify the cost of delay.
Jackson links his measure with a normative suggestion for the structure of benefit reductions in a reform plan.[5] In particular, he argues that reforms should treat accrued benefits differently from benefits expected to accrue.[6] This conclusion seems problematic for several reasons. First, the level of “accrued” benefits can be defined in many different ways, as Jackson notes.[7] Requiring that a reform not affect accrued benefits would artificially elevate the importance of deciding which of these measures is the best one.[8] Second, even if agreement could be reached on the most accurate way of defining accrued benefits, the question would arise of whether changes in benefits would be fairer if reformers focus on the total level of benefits of different individuals or on the distinction between accrued and not-yet-accrued benefits. Paying attention to a reform’s anticipated levels of benefits for different cohorts and the differences between those levels and previously scheduled benefits, along with the time lag until the change affects the actual payment of benefits, is a better focus for reformers.
One reason for preferring a focus on total benefits is that workers will likely pay more attention to that measure. A second reason has to do with fairness. Consider two individuals of the same age who end up with the same Average Indexed Monthly Earnings (AIME)[9] but different age-
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earnings patterns. One had relatively high earnings early in life, whereas the other had relatively high earnings later in life. A reform that continues to base benefits on AIME would treat the two the same. A reform that treated accrued benefits at the time of reform (somehow measured) differently from benefits based on later earnings would treat these two workers differently. Yet there seems no good reason to treat these two workers differently, assuming that AIME continues to be judged the appropriate basis for determining benefits.
Jackson argues that distinguishing accrued from not-yet-accrued benefits expands the opportunities for designing reforms.[10] That is unfortunately incorrect, and the practical effect could be precisely the opposite: Identifying benefits as “accrued” would undoubtedly accord those benefits a stronger degree of political protection against being reduced, thereby potentially limiting the degree of flexibility in designing a reform plan. In other words, a distinction between accrued and not-yet-accrued benefits changes the opportunities for reform, eliminating some options and adding others. The fundamental issue is therefore whether Congress would do a better job in allocating benefit reductions across different individuals with or without the constraint that accrued benefits be fully paid. The current approach is likely to work better because it relates directly to what beneficiaries really care about—the total of benefits to be received—and avoids the distinctions, as in the example above, that seem to have no good welfare basis. For example, would it have led to better legislation in 1983 to adjust the normal retirement age for part of benefits but not for all of benefits?[11]
Putting primary emphasis on the accrual measure that Jackson favors is thus potentially problematic for precisely the reason that he views as advantageous: that the natural tendency of highlighting that figure would be to encourage reform plans to distinguish between accrued and not-yet accrued benefits. To be clear, expanding the set of measures used to evaluate long-term solvency in Social Security would be beneficial. We do not, however, share Jackson’s enthusiasm for making his accrual measure the central metric through which Social Security’s financing and reform plans are viewed. The next Part discusses the role of solvency measures in the reform process and explains why the current seventy-five-year actuarial imbalance measure reflects a good balance among many competing demands.
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Currently, the measure that plays the largest role in Social Security public debate and reform proposals is the seventy-five-year actuarial deficit.[12] The Office of the Chief Actuary (OCACT) actually evaluates the system against many metrics, not only the seventy-five-year one. In particular, for OCACT to report that Social Security is in actuarial balance, its projection of the program’s future financing must pass several tests, all of which must be met in order for the system to be deemed in actuarial balance. If short-run finances are insufficient to pay scheduled benefits, the system is clearly not in balance. Over longer periods, the reliability of the projections declines; as a result, if the projected long-run shortfall is modest enough, corrective action is not necessarily warranted and the system is deemed to be in balance.[13]
Noteworthy in this system is attention to both a present discounted value calculation and cash-flow considerations. It is very important that both cash-flow issues and present value issues be evaluated. Cash-flow concerns imply a presumption that Social Security will not be allowed to paper over its financial shortfalls by borrowing or by accounting gimmicks. For example, consideration only of a present value calculation would allow the use of distant (and politically implausible) large payroll tax increases to restore actuarial balance as part of a plan. There is of course no absolute protection against accounting gimmicks—they are always available, no matter what the accounting procedure. But gimmicks should be easily detectable, to lessen the likelihood and importance of their use.
The annual cash-flow projections and the current level of the Trust Fund are used to compute an “actuarial balance” figure. This measure reflects the degree to which the current Trust Fund and projected revenue over some period of time are sufficient to finance projected costs. When the projection shows insufficient resources to pay scheduled benefits, OCACT calculates the level of additional resources that would be sufficient to pay the benefits and also leave the Trust Fund with a projected balance equal to the following year’s expenditures (a precautionary balance) at the end of the projection period.[14] The result is the “actu-
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arial deficit” or “actuarial imbalance”; the seventy-five-year actuarial imbalance is the single most visible number for evaluating Social Security’s finances.
The actuarial imbalance is traditionally presented relative to taxable payroll.[15] That is, OCACT reports the actuarial imbalance as a share of taxable payroll over the next seventy-five years. One interpretation of this figure is that it represents the payroll tax increase that would be sufficient to finance benefits over the seventy-five-year horizon provided the increase began the following year and remained in force for the full seventy-five-year period.[16]
Jackson would replace the seventy-five-year actuarial balance (as the central measure in Social Security reform discussions) with a measure reflecting the closed-group deficit for those over fifteen years of age.[17] In other words, he would shift the discussion of the deficit in Social Security from an annual basis (i.e., seventy-five years) to a cohort basis (i.e., those over fifteen years of age).
Note that Jackson seems to share the view, inherent in the seventy-five-year actuarial imbalance measure, that an infinite horizon calculation should not be the focus of public discussion:[18] His exclusion of those fifteen years of age and younger reflects a view that some form of truncation is appropriate. A truncated measure is appropriate for the central measure of Social Security’s financial condition, but the current measure is more attractive than Jackson’s alternative. Because neither he nor we prefer an infinite horizon measure, the appendix provides arguments for preferring the seventy-five-year horizon to an infinite horizon.
The seventy-five-year measure not only defines the size of the deficit, but also provides a natural and understandable goal for reform: seventy-five-year balance.[19] A shift to the closed group measure that Jackson favors raises the question of what target for reform would result. As Jackson recognizes, embracing the closed-group measure does not imply
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embracing a goal of zero balance for the closed-group deficit.[20] Eliminating the closed group deficit would in effect imply full funding.
Full funding is not an appropriate goal for reform at this point because it would impose an unfairly large burden on transition generations. Social Security was very generous to earlier cohorts.[21] The cost of that generosity means that the Trust Fund is smaller than it would have been if we had been less generous to earlier cohorts. The difference between what the Trust Fund would have been in the absence of allowing earlier cohorts to enjoy above-market returns on Social Security, and what the Trust Fund is today, reflects what we call Social Security’s “legacy debt” from its past.[22] That legacy debt should, arguably, be spread over all future generations. Moving instead to full funding by some deadline would impose the full cost of financing the legacy debt on a limited number of generations, while sparing all future cohorts from sharing in that cost. In our view, it is difficult to justify imposing such a constraint on reform.
Jackson shares this view, arguing that some degree of partial funding is an appropriate choice for Congress.[23] But then what is the target for the closed-group balance and how is such a target set? The political process does not seem particularly adept at setting complex targets. Jackson considers the possibility of stabilizing the ratio of the implicit Social Security debt to Gross Domestic Product (“GDP”), which has some analytical attraction.[24] But stabilizing the ratio of public debt to GDP is a similarly attractive goal for the unified budget, and it has never caught hold with the public despite the fact that many members of the public appear to be concerned about the nation’s fiscal imbalances. One drawback to using Jackson’s proposed measure as the most prominent metric of Social Security finances is thus that it does not lend itself to a reasonable, natural target for reform. It may therefore dissipate political attention into arguing over the right target rather than agreeing to the steps for reaching that target. In particular, if an accrual measure were adopted, shifting the target for a reform might well prove to be politically easier than addressing a given shortfall through a combination of tax increases and benefit reductions.
In addition, it is important to note that both the closed-group and the seventy-five-year solvency measures potentially distort reform ideas—albeit in different ways—relative to some complete measure of their effects. Much of the problem arises from the fact that we tend to think of, and act on, benefit rules on a cohort basis but think of, and act on, tax rates and
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taxable earnings levels on an annual basis.[25] Given this disjunction, a single measure cannot do justice to both concerns. For example, using a seventy-five-year actuarial balance measure makes an increase in the maximum taxable earnings base (that is, the earnings base subject to tax) appear to contribute more to financial restraint than it really does, because implied benefit increases beyond the seventy-five-year horizon are not included in the measure. On the other hand, consider a hypothetical system in which cash shortfalls begin in ten years, and assume an increase in the tax rate starting at that time. The tax increase generates revenue in years with a projected cash shortfall, and part of that revenue is excluded from the closed group measure since workers now younger than fifteen will be paying part of the future taxes. The relative distortions caused by the different metrics will depend on the specific projections and the nature of the reforms involved.
The main thrust of Jackson’s article is a proposed modification to the focus of accounting for Social Security reform. The more radical portion of his analysis, though, involves also shifting the accounting system for Social Security in the context of the federal budget. Even for budgetary purposes, he considers replacing annual cash-flow accounting for Social Security with annual accrual accounting.[26] He argues that this change will cause policymakers to enact higher taxes or lower spending, or both, with this move desirable because accrual accounting will give a better picture of the change in long-run budgetary pressures.[27] Jackson argues that politicians are more likely to focus on the unified budget than on the non-Social Security budget when Social Security is in surplus and on the non-
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Social Security budget when Social Security is in deficit.[28] The focus of this Comment is on the Social Security measure, not the distinction between unified and other budget measures.
Although there is always a case for pragmatism, it is worth noting that the current divergence between the cash-accounting and accrual-accounting measures could readily go the other way in other times. If the goal is simply to apply pressure for fiscal discipline, and even assuming that increases in the perceived deficit in Social Security would raise such pressure, it is not clear that a permanent change in accounting is necessarily beneficial. In particular, if a well-designed Social Security reform plan that restores long-term solvency to Social Security is enacted, it is likely to be the case that cash-flow deficits will occur as the government draws down the Trust Fund that was accumulated precisely to help finance the retirement of the baby-boomers. The accrual measure that could accompany such a reform may, however, show different results, as benefits are paid to the already retired and new cohorts are accruing benefits more slowly as a result of reform. Our choice of budget concept should not depend solely on how it would influence policymakers in the current environment.
Typically, cash flows give a better picture of short-run macroeconomic effects, whereas accrual measures give a better picture of the change in long-run positions. Thus there is an important role for both. In terms of informing the public, a case could be made that the public is already fairly aware of short-run macroeconomic issues and it is therefore more important to focus on long-run issues, making accrual accounting look attractive. Such a case would be more persuasive if accrual accounting also seemed reasonable from other perspectives, but that is not the situation.
Jackson correctly notes that the unified budget already incorporates a very limited amount of accrual accounting.[29] The modest size of those budgetary categories, however, means that many of the difficult issues involved in accrual accounting do not rise to the level of generating political discussion and disagreement. Employing accrual accounting with regard to Social Security would qualitatively be a different matter. Furthermore, it is difficult to see why accrual accounting should be undertaken for Social Security, and not also for Medicare and Medicaid.[30]
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Given the difficulty of drawing the line between Social Security and other programs, it is important to evaluate the effects of accrual accounting under the assumption that a substantial share of the federal budget were accounted for in this manner. That perspective highlights two principal problems.
First, accrual measures are easy to manipulate.[31] Accrual measures—like other long-term projections, including the seventy-five-year actuarial imbalance—are extremely sensitive to assumptions about the future. Seemingly small and reasonable changes in assumptions about the future manifest themselves as large changes in accruals. If these measures were the focal point for evaluating the budget, there would inevitably be pressures in some budgetary conditions to shade the projections in a manner that makes the outlook look better. That pressure could then contaminate the process by which OCACT makes its projections; OCACT’s reputation as an “honest broker” is extremely valuable and the loss of that reputation would be very costly to the prospects for Social Security reform.[32] The broader point is that the more sensitive a measure is to reasonable variations in assumed parameters, the more important it is to provide a range of estimates rather than just a point estimate. And the budget process needs a point estimate to function.[33]
Second, just as accrual accounting for Social Security fails to provide a natural, reasonable target, accrual accounting in the unified budget does not provide an easily understandable target that is also a sensible one. Preserving the ratio of implicit liabilities to GDP may be sensible, but it is unlikely to be understandable as the primary goal of budgetary policy. Lacking a natural target for balance could undercut the pressure for balancing any given measure, because it is typically easier to shift the target than to enact the changes necessary to reach a given target.
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Annual accrual accounting for Social Security would be a useful addition to the information provided to the public, but it should not become the central number used in policy discussions. The issue is not whether accrual information would be helpful—it would be. Instead, the issue is whether recasting the political process to concentrate primarily on accrual measures rather than the current measures would be more likely to generate sound decision-making. Jackson argues that the current accounting system impedes reform by comforting policymakers that the problems facing Social Security are decades away. But accrual accounting would not change the basic human tendency, which also manifests itself among policymakers, to ignore or delay addressing long-term problems. Furthermore, accrual accounting measures are extremely sensitive to the assumptions employed. To the extent they were granted a much larger role in the federal budget, they would likely induce pressures that could ultimately undermine the perceived legitimacy of the actuarial and budgetary projections.
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The traditional seventy-five-year metric for achieving long-term balance in Social Security has recently been under attack from opposite directions: some would like to shorten the period to fewer than seventy-five years, and others would like to extend it well beyond seventy-five years. Ideally, the projection period should be long enough to make sure Congress is not slighting future concerns, but not so long that it is addressing problems that are very unlikely to develop as projected. It seems to us that a seventy-five-year projection period is a good compromise between these two concerns.
Plans that fail to achieve seventy-five-year actuarial balance may or may not include beneficial changes to the program, but they do not put Social Security on a firm long-term financial footing. Reforming Social Security is a difficult and complicated task. Policymakers are unlikely to be willing to undertake substantial reforms to the program every year or even every few years. It is therefore important that, when reform does occur, it put the system on a sound basis for an extended period of time. Furthermore, workers deserve to have some sense of the program’s structure in the future, so that they can plan for their own retirement and other financial needs. The seventy-five-year horizon provides a reasonable approximation of the lifespan of workers just entering the labor force: A twenty-year-old worker today, for example, has less than a five percent chance of living past ninety-five.[34] Failing to achieve seventy-five-year solvency would leave too much uncertainty about the future course of the program. But extending the central measure of actuarial balance beyond seventy-five years also has downsides.
A final reason for continuing to support the seventy-five-year measure is that despite recent criticisms, this traditional measure enjoys a surprising degree of bi-partisan support among policymakers. Such bi-partisan consensus is rare in Social Security reform. Even if the optimal projection period were slightly shorter than seventy-five years or slightly longer than seventy-five years, any gains from changing it may not be worth opening up the Pandora’s box of precisely what that projection period should be.
The imbalance over the indefinite future does provide useful information, but a key question is what horizon policymakers should adopt for the purpose of evaluating reform. Despite some theoretical attraction of the indefinite future or “permanent” imbalance measure, in practice using that metric as the primary measure of Social Security’s deficit would prove problematic. The legislative process invariably places heavy weight on certain summary statistics, such as actuarial balance. If that balance is
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defined over an indefinite future, an excessive degree of reliance could be placed on the harder-to-predict, more-distant future. Focusing exclusively on a very long horizon can also make it easier to employ gimmicks: A massive tax rate increase scheduled for the years 2150 and beyond, for example, could technically address the permanent imbalance in Social Security but would be widely and correctly seen as having no credibility.[35]
To be sure, longer projection horizons are beneficial for some purposes. But calculations with a longer horizon can alert us to serious drawbacks in proposals without playing a central role in the constraints on the legislative process. Besides, there is no reason to try to fix Social Security forever—future Congresses can and should respond to changing circumstances, and the legislative process should give far more weight to concerns thirty-five years from now than 135 years from now. At the same time, we do not want to put in place a system that we expect will be out of seventy-five-year actuarial balance very shortly.
[*] Institute Professor
and Professor of Economics, Massachusetts Institute of Technology. Ph.D.,
Massachusetts Institute of Technology, 1963; B.A., Yale, 1960.
[**] Joseph A. Pechman Senior Fellow in Economic Studies, Brookings
Institution; Co-Director, Tax Policy Center. Ph.D., London School of Economics,
1997; M.Sc., London School of Economics, 1992; A.B., Princeton University, 1991.
The views expressed here are the authors’ alone and do not necessarily
represent those of the staff, trustees, or officers of the institutions with
which the authors are affiliated. The authors thank Henry Aaron, William Gale,
and Howell Jackson for helpful comments.
[1] See Howell E. Jackson, Accounting
for Social Security and Its Reform, 41 Harv. J. on Legis. 59 (2004).
[2] The availability of this information
distinguishes Social Security presentations from the corporate accounting
scandals with which they are sometimes compared. That politicians and the media
focus on some measures of Social Security solvency over others does not mean
that the basic facts are hidden from view. In distinguishing the accounting
appropriate for corporations and governments, it is also important to emphasize
the distinction between accounting to inform lenders and accounting to inform
taxpayers. With corporations, informing lenders (and potential stockholders) is
central. Although lenders to government are also concerned with future
obligations, the nature of the primary concern is different: it involves the
willingness and ability to levy taxes to pay back debts. The fact that tax rates
in any year are the same for workers in different cohorts increases the value of
the traditional measure of actuarial balance relative to a cohort-based
measure.
[3] See Jackson, supra note 1, at Part II.B.2.
[4] Soc. Sec. Advisory Bd., Why Action Should Be
Taken Soon 17 (July 2001).
[5] Benefit reductions are measured, as they
should be, relative to the benefits that would be generated by the current
benefit formula.
[6] See Jackson, supra note 1, at Part II.B.4.
[7] See Jackson, supra note 1, at Part II.A.
[8] The recent uproar surrounding the transition
from traditional defined benefit plans to cash balance plans in the private
sector highlights the controversial nature of how “accrued” benefits
are defined. See, e.g., Mary Williams Walsh, It May Be Time to Plumb
Your Pension’s Depths, N.Y. Times, Dec. 15, 2002, at 8.
[9] For a description of the AIME calculation,
see Staff of House Comm. on Ways and Means, 106th Cong., 2000 Green Book:
Background Materials and Data on Programs Within the Jurisdiction of the
Committee on Ways and Means 19–21 (Comm. Print 2000).
[10] See Jackson, supra note 1, at Part III.B–D.
[11] See generally Social
Security Amendments of 1983, Pub. L. No. 98-21, 97 Stat. 65 (1983).
[12] This measure is equal to the present
discounted value of annual cash flows over the next seventy-five years minus the
existing Trust Fund plus the cost of ensuring the Trust Fund at the end of the
seventy-fifth year is equal to the projected expenditures in the seventy-sixth
year. See Peter A. Diamond & Peter R. Orszag, Saving Social Security:
A Balanced Approach 30–34 (2004).
[13] Reports are made for Old-Age Survivors
Insurance (OASI) and Disability Insurance (DI) programs separately as well as
for the two together. We focus only on the latter. See generally 2003 Bd.
of Trs. of the Fed. Old-Age and Surviviors Ins. and Disability Ins. Trust Funds
Ann. Rep., H.R. Doc. No. 108-49, at 44–50, available at http://www.ssa.gov/OACT/TR/TRO3/tr03.index.html
[hereinafter 2003 Trustees Report].
[14]
An actuarial balance of zero for any period would indicate that estimated cost for the period could be met, on average, with a remaining trust fund balance at the end of the period equal to 100 percent of the following year’s cost. A negative actuarial balance indicates that, over the next 75 years, the present value of income to the program plus the existing trust fund falls short of the present value of the cost of the program plus the cost of reaching a target trust fund balance of one year’s cost by the end of the period.
Id. at 58.
[15] See id. at
45. (explaining “basic to the consideration of the long-range actuarial
status of the trust funds are the concepts of income rate and cost rate, each of
which is expressed as a percentage of taxable payroll”).
[16] Technically, the payroll tax increase must
be large enough to leave a Trust Fund equal to the following year’s
expenditures at the end of the projection period.
[17] See Jackson, supra note 1, at Part II.C.5.
[18] See id. at Part I.A.1.b.
[19] Those preferring a larger Trust Fund in
order to encourage more national savings could argue for a target Trust Fund
ratio in excess of one as part of the definition of “actuarial
balance.”
[20] See Jackson, supra note 1, at Part III.A.3.
[21] See, e.g., Dean R. Leimer,
Cohort-Specific Measures of Lifetime Net Social Security Transfers 16 (Soc. Sec.
Admin. ORES, Working Paper No. 59, Feb. 1994).
[22] See Diamond, supra note 12, at 37–39, 88–93,
182–83, 197 (discussing the legacy debt concept in the design of Social
Security reform).
[23] See Jackson, supra note 1, at introduction.
[24] See id. at Part III.A.3.
[25] For example, the 1983 reforms changed the
normal retirement age on a cohort basis and accelerated the year of scheduled
tax rate increases (i.e., implemented changes on an annual basis). See
generally Social Security Amendments of 1983, Pub. L. No. 98-21, 97 Stat. 65
(1983). It is noteworthy that Sweden has adopted an automatic adjustment
mechanism to minimize (and possibly eliminate) the chance of running out of
money. See Diamond, supra note 12, at 82–83. Similarly, one could
think of a pure pay-as-you-go system that calculated relative benefit claims
based on individual relative earnings histories and then set the overall benefit
level to match the revenues available precisely. This system would be organized
on an annual basis. But this would be obscured by cohort-based accrual
accounting.
[26] See Jackson, supra note 1, at Part II.D.
[27] It is worth noting that for some issues,
the unified cash budget is a better simple guide than the other measures under
consideration. As noted by Jackson, the most obvious example is with regard to
Treasury sales of bonds to the public. See Jackson, supra note 1, at Part I.B.2. More importantly, the
unified budget is also critical for considering short-run macroeconomic policy.
While Social Security analysts appropriately pay attention to long-run issues,
many individual consumers appear to pay far more attention to cash flows, making
the unified budget measure an important one, even if it does not accurately
capture longer-run fiscal imbalances.
[28] See Jackson, supra note 1, at Part I.B.2.
[29] See id. at Part IV.A.1.
[30] To highlight the difficulty, note that no
one expects defense expenditures ever to end. One could thus consider accrual
accounting for defense spending based on measures of international risk. To be
sure, one distinction is that the other programs are already legislated to be
permanent, whereas defense spending is appropriated each year through specific
expenditure legislation. One could also draw the distinction between Social
Security, which is financed fully by dedicated revenues, and other programs that
are not. But this distinction is more closely related to separating budgets than
the type of accounting in each budget.
[31] Cash-flow measures are admittedly not
immune to manipulation, given the ability to move cash flows between budget
years, but they are relatively difficult to manipulate compared to accrual
measures.
[32] The quality of Social Security projections
in the United States is much higher than in many other countries, such as
Germany. In most other countries, there is no counterpart to the relative
independence of the OCACT, and it is important to preserve this extremely
valuable independence.
[33] This concern is similar to the one that
surrounds the use of dynamic scoring in evaluating budgetary proposals. Dynamic
scoring incorporates the macroeconomic feedback effects from proposals, and is
very sensitive to small changes in the assumptions. It is therefore reasonable
to undertake dynamic analyses in which a range of estimates can be provided, but
much less reasonable to undertake dynamic scoring in which a single estimate
must be provided. See, e.g., Original Jurisdiction Hearing: Hearing on
the President’s “Freedom to Manage” Initiative Before the
Subcomm. on Legislation and Budget Process of the House Rules Comm., 107th
Cong. 8–9 (2002) (statement of Peter R. Orszag, Senior Fellow, Brookings
Inst.).
[34] See Diamond, supra note
12, at
33.
[35] Such a proposal might restore balance to
the long-term budget of Social Security but would not pass the “Test of
Long-Range Actuarial Balance,” which compares the balance over the
sub-periods from the present out to the seventy-five-year horizon to an
allowable deviation from balance. Thus actuarial balance over seventy-five years
(or solvency over seventy-five years) is neither necessary nor sufficient for
this measure.
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Harvard Journal on Legislation (JOL) - Volume 41, Number 1, Winter 2004
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