Accounting for Social Security, Medicare and Other Social Insurance

By: Richard Fontenrose, CGFM

Richard Fontenrose, CGFM, a member of AGA's Washington, D.C. Chapter, is the assistant director of the Federal Accounting Standards Advisory Board.

On Nov. 17, 2008, the Federal Accounting Standards Advisory Board (FASAB) issued an exposure draft (ED) regarding accounting for Social Security, Medicare and other “social insurance” programs titled Social Insurance Accounting, Revised. Social insurance comprises five programs but two—Social Security and Medicare—are of special significance because of the high rate of participation among citizens, the fiscal challenges related to the programs, and the challenges associated with incorporating estimates of future cash flows of this magnitude in financial statements. 

Fundamental questions about social insurance programs can be addressed by financial reporting. The information provided as a result of this proposed standard should help users answer questions about social insurance commitments and the reasons these commitments change over time. 

From the outset of the social insurance project, members have agreed on the objectives of financial reporting for social insurance programs but have had different views about how best to achieve the objectives. Members have agreed that social insurance information should be included in the basic financial statements, should be audited, and should be “transparent”—that is, readily understandable to an interested, non-expert reader. Members also have agreed that the financial report should highlight any long-range fiscal imbalances anticipated in social insurance programs. Moreover, all members have supported several innovations. They have supported a new basic statement presenting changes in the amounts presented on the statement of social insurance. All members have supported new reporting on fiscal sustainability in the consolidated Financial Report of the United States Government (CFR). However, they have had different views about the timing of the recognition of expense and liability for social insurance programs and about what should be reported on certain financial statements.

Some members believe that an expense is incurred and a liability arises for social insurance programs during the working lives of participants, and that some portion of the benefits accumulated at the balance sheet date should be recognized as a liability. Other members agree with Statement of Federal Financial Accounting Standards 17, Accounting for Social Insurance that an expense is incurred and a liability arises for social insurance programs when the participants have met all eligibility requirements and the amount is “due and payable.”  

The exposure draft represents a compromise. The proposed standard does not change the liability and expense recognition and measurement from SFFAS 17. It proposes enhanced reporting but does not resolve the two strongly held views regarding when the obligating event occurs for social insurance programs and, thus, when the liability and expense definitions are met within those programs.

The proposed standard requires the addition of the following information:

• Critical information about costs, assets and liabilities, social insurance commitments, budget flows, and the “fiscal gap” in a section in management’s discussion and analysis devoted to financial statement analysis.

• A new line item representing the closed group measure that would be presented on the balance sheet below assets, liabilities, and net position and that would not be included in the totals for these classifications.

• A new summary section for the statement of social insurance presenting the closed and open group summary totals.

• A new basic financial statement to present the reasons for changes during the reporting period in the closed group measure reported on the statement of social insurance.

• Other information. 

Thus, the standard proposes additional key information not currently provided and would link information from the statement of social insurance to other basic financial statements. 

Six members have endorsed the proposal presented in the ED. As with all compromises, members have diverse views. Five members are seeking comments on an alternative view regarding when the liability definition is met.  Three members oppose certain aspects of the proposal. They seek comments on their alternative view.  

What are your views? How should Social Security, Medicare and other social insurance be accounted for? Does the compromise provide additional useful information? What should the balance sheet present as a liability? Should there be a new, supplementary balance sheet line item as described in the exposure draft?     

The ED requests comments by Feb. 9, 2009. The ED is available at the FASAB website.

Comments

[anna]

Thank you. What you said in the last paragraph was very interesting. I did not know that about the cumulative excess payroll taxes. It would be a good project for the FASAB to take up.

[Richard Fontenrose]

Ms. Miller, very good observations. How to weigh the beliefs and expectations of citizen-participants regarding social insurance has been an issue during the development of this standard. Some argue that constructive or other liabilities are being created by the program's design and representations. They note that citizens pay earmarked taxes into a program for years with an understanding that retirement benefits will be received; and that taxpayers are told to and do rely on these representations over the years when planning their retirement. Others emphasize pay-as-you-go elements of the program. Unfortunately, there hasn't been one consensus answer to this question. Social insurance is complex. It challenges the current reporting model.

Regarding the trust fund question, the concept of a "real" trust fund has been discussed in recent years. The social insurance trust funds are currently holding more than $2 trillion of Treasury securities, representing cumulative excess payroll taxes received to date. The General Fund will one day in the not-too-distant future have to redeem these securities from current general funds or by issuing "public debt." Two trillion dollars would be a lot to invest in the private market, and there are administrative issues for the Treasury Department; but investing the surplus payroll taxes in non-federal investments would mean that the social insurance payroll tax surplus wouldn't be available for financing current deficits. The current year funding shortfall would have to be dealt with sooner rather than later. In addition, some have argued that at least the federal government should report a liability for the cumulative excess payroll taxes, rather than the current practice of buying Treasury securities that are eliminated, as intra-government debt, for the consolidated financial report of the United States government. This question may well work its way onto the FASAB agenda.

[anna]

I think we have to look at what society, specifically the citizen, believes. Many people believe that because they paid an amount in to social security from their pay in each pay period that this AT LEAST should be returned to them. That would make that amount a liability in my opinion as soon as the person meets the threshold qualification to be eligible for social security on retirement. Of course the ampunt would have to be an estimate based on actuarial calculations about lifespans and expected life expectancy and so on.

Also, another question often occurs to me. Would this problem have arisen if from the start social security payments from citizens had been kept in a separate trust fund, in a real if virtual lock-box, rather than being subject to being raided by the federal government for payouts for other pressing societal needs, and replaced with IOUs?