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You pay for entitlements, but what are you going to receive?

February 27, 2015

The dictionary gives us some guidance for what “entitlements” are, but our federal government defines them a little bit differently.

The government currently spends trillions of dollars on its entitlement programs. The federal government’s most recent income statement included $1.8 trillion in spending for the Social Security Administration and the Department of Health and Human Services. These two departments are responsible for three of the largest entitlement programs – Social Security, Medicare, and Medicaid.  Spending reported on those two line items amounted to nearly half of all reported federal spending. 

Although Social Security, Medicare, and Medicaid are called entitlement programs, the government does not account for them as if people are “entitled” to benefits. The government does not include obligations for future benefit payments on its balance sheet.  The government sends us statements of our estimated Social Security benefits, but does not recognize most of them as liabilities on its balance sheet.

The government includes only a small sliver of entitlement obligations on its balance sheet – those “currently due and payable.”  In 2013, the latest year available, that small sliver amounted to about $170 billion – just a tiny slice of the present value of unfunded future benefits slated to be paid under current law.

How can the government justify reporting such a “small” amount?  Because, as government representatives have testified, the government can change the law at any time.  Under the accounting standards the federal government sets for itself, the government chooses to report only the “present obligation.”

This accounting is misleading and lies at odds with principles established for the private sector.  The accounting principles the government oversees for the private sector define a liability in part as a “probable future sacrifice of economic resources,” while the government only includes present obligations in reporting its own debts. 

If Social Security and Medicare are “mandatory” spending, why aren’t the obligations liabilities?  The government reports “entitlement” programs in the “mandatory,” not “discretionary,” section of the budget.  This can leave an impression that the government is bound to pay those future benefits.  But the government doesn’t include them as liabilities because it says it can change the law at any time.

This means the government overstates its income and understates its debt.  Growth in unfunded liabilities are an expense, in accrual accounting, but they are not reported as expenses by the federal government.  The government excludes growth in unfunded entitlement obligations from its income statement, as well as its balance sheet. 

Future entitlement benefits are at risk. The amounts the government tells us to expect on our Social Security statements may be worth more than the paper they are printed on, but they may not be worth what the government estimates for us.  A bird in the hand is worth in the bush, the saying goes.  Our government’s accounting suggests those entitlement birds may fly away someday. 

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