Institute for Truth in Accounting

May 23, 2007 Verbal Testimony before the Federal Accounting Standards Advisory Board

“Should Social Security and Medicare Liabilities be Put on the

Federal Financial Report?”

The Institute for Truth in Accounting (IFTA) thanks the Federal Accounting Standards Advisory Board (FASAB) for the opportunity to respond to this Preliminary Views (PV) document. The Institute, founded in 2002, is a nonprofit organization with no political affiliations. It is made up of business, academic, governmental and other community leaders who are committed to high standards of ethics and integrity, and who support these principles in the private as well as in the public sector. Our mission is to enhance the credibility of public and private sector financial reporting by encouraging the issuance of understandable, reliable and relevant information. The federal government of the United States of America (the Government), being the largest fiscal organization in the world, should be the leader in providing such information. To be active participants in their democracy, citizens need such information. To promote the accountability of elected officials, the Government has a special responsibility to provide the public with information that allows for the evaluation of the decisions made by those elected officials.

The members of the Institute would like to commend FASAB for engaging in an open public dialogue on federal accounting standard for social insurance. We would like to express our admiration to FASAB for their leadership on this issue.

Today there is a great emphasis on transparency in financial reporting. IFTA finds the Primary View presentation of Social Insurance costs and liabilities to be the more transparent of the two views presented in the October 23, 2006 Preliminary Views document. As Congressman Jim Cooper highlighted in his comment letter, it is imperative that the liability included on the federal financial report should be in harmony with the public understanding of social insurance. Fundamentally, the Social Security and Medicare programs remain premised on the promise that an individual’s “contribution” to the program is held by the Government in trust and then paid out in retirement. These programs to date are not billed to be forms of taxation separated from and independent of the benefits to which one is entitled upon retirement or disability. It is well established that the promise of social insurance benefits is a legitimate "social contract." IFTA believes that the Primary View presentation of Social Insurance costs and liability would provide the most accuracy representations of the public understanding.

IFTA does agrees with the Alternative View that recognition of future social insurance benefits, which have vested due to a covered work period, on the financial statements would diminish significantly the relative size and importance of other expenses and liabilities shown on the financial statements. This should not be considered negatively. This is a reality citizens need to know. Omitting what currently are monstrous costs and liabilities from the face of the government-wide financial statements grossly distorts the presentation of the Government’s true financial position from the perspective of the constituency from who these reports are most directly useful—the American citizens. This inappropriately shifts the focus away from the most financially significant programs managed by Federal agencies.

When the Preliminary Views document was issued the six public members supported the concept that Social Insurance be recorded as a liability on the government’s balance sheet. From the first time I heard about FASAB setting Generally Accepted Accounting Principles for the federal government, I have been concerned about the Board’s lack of independence. Governmental officials have the authority to appoint members to the governmental standard setting body. I equivocate this to the auditors and accountants of General Motors determining what General Motors will report on their financial statements. During this deliberation of the social insurance standard my apprehension about the Board’s independence has been heightened by the January 1, 2007 appointment of a former federal employee and federal member of FASAB to serve as a non-federal member.

In conclusion I would like to tell you about my experience the last time I testified before this board. On September 27, 2006 Rick Skiba, an IFTA Expert Advisor, joined me in testifying before FASAB on its proposed concepts statement, Definition and Recognition of Elements of Accrual-Basis Financial Statements. Steve Goss, Chief Actuary of the Social Security Administration, also testified that morning. My recollection of his testimony was he stated he did not believe Social Security or Medicare should be recorded as a liability on the federal government financial report. In follow up Questions & Answers, I recall that one of the FASAB members asked Mr. Goss, if he was saying that the federal government did not owe citizens benefits until benefit checks are printed. Mr. Goss said that was correct.

After these testimonies I returned home to Chicago. Two days later I had the opportunity to attend a breakfast where a member of Congress was the keynote speaker. After the member of Congress spoke he was asked about the fact that workers of corporations are losing retirement security because corporations are shifting from defined benefit programs to defined contribution programs. The member of Congress expressed concern that retirees would not be guaranteed a level of benefits under a defined contribution program. Then he stated that this is why we must keep Social Security strong because it is the only “guaranteed” benefit that retirees can count on.

This re-election marketing strategy, which proliferates the entire Congress, is why the Institute for Truth in Accounting believes that if FASAB does not vote to record Social Insurance promises as a liability on the federal government financial report, then the following measurers must be taken:

1) The cancellation of the 7.65% in specific social insurance payroll taxes and related employer payroll taxes;

2) The discontinuation of the use of the term “trust fund” by Government employees and officials, including members of Congress and the Administration, to describe funds that the Government has custody and control of and does not take on a fiduciary responsibility to hold in trust for beneficiaries;

3) The cessation of issuing personalized annual Social Security Statements of estimated benefits;

4) A massive, straight-forward education program to inform the American public and their elected officials that social insurance benefits are not guaranteed and can be canceled or reduced at any time. American workers must be told that payroll taxes taken out of their paychecks are forms of taxation, not “contributions” maintained in separate “trust fund” accounts. Members of Congress and the Administration should be the first students of this educations program. Then members of Congress should be required to tell their constituents the truth and stop getting elected by promising the large senior voting bloc Social Security and Medicare benefits.

5) Finally a law should be enacted that would consider it felony fraud for any Government employee or officials, including members of Congress and the Administration, to imply the continuation of social insurance programs and the solvency of “trust funds.”

I have been working on federal budgeting and accounting issues for fifteen years. During that time I have determined that the number that the media and public regularly pay attention to is the deficit number. At the Institute we consider the deficit number to be the marquee number. Within the government’s annual financial report there is a number that corresponds to the deficit number. It is called net costs. If members of FASAB have a problem with calling the Social Insurance obligations “liabilities,” then we strongly urge that these obligations are put them on the balance sheet in some other understandable form. More importantly it is imperative that the increase or decrease in Social Insurance obligations is included in the net costs. This information would empower citizens to hold elected officials accountable for changes made to these programs.

The Institute for Truth in Accounting would like to thank you again for the opportunity to comment on this Preliminary Views document. In your deliberation please consider that citizens need to be able to clearly see all of the relevant facts about our country’s financial position on a timely basis and in an understandable format.