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Wednesday, November 01, 2006

A Better Measure of Long-Term Spending: FASAB Proposes Changes in Accounting for Social Security, Medicare

The Federal Accounting Standards Advisory Board issued a report on October 23 calling for changes in financial reporting for social insurance programs. This is an important step that will provide better financial information on the operations of the federal government. It will also help to begin a serious discussion of how the huge impact of future entitlement spending should be reflected in the federal budget. Social Security and Medicare represent a growing threat to the federal budget, one that bodes ill for future generations. Understanding and indicating their financial effect on the nation’s fiscal burden is key to sound financial management.

What is FASAB and What the Report Did
The Federal Accounting Standards Advisory Board (FASAB) is a rather obscure quasi-governmental organization that establishes the generally accepted accounting principles (GAAP) used to prepare the federal government’s financial report. These standards are established through “Statements” issued by a joint public- and private-sector-member board. FASAB considers a broad array of viewpoints and input in establishing these standards, and its deliberations often take a few years before a final standard is issued. FASAB’s new report aims to strengthen financial reporting for social insurance programs. Because there are two views that differ strongly on how best to accomplish this, the report establishes common ground and then discusses each view in depth. FASAB is requesting public comment before it proceeds with a final standard.

Two Views on Needed Changes
FASAB members agree that financial statements should help Congress, the media, and the public make informed decisions about whether these social insurance programs are sustainable as they are designed today, whether the federal government’s financial position has improved or worsened due to these programs, and to what extent these programs will be able to provide benefits in the future. But there are two views on how to do this. Both—the “Primary” and the “Alternative”—agree that information on social insurance programs should:

  • Be included in the basic federal financial statements,
  • Be audited,
  • Be readily understandable to a non-expert reader, and
  • Clearly illustrate any projected long-range fiscal imbalance.

The views differ on how and what to include in the financial statements. According to David Mosso, FASAB Chairman, both views would include the present values of projected future program revenues and scheduled benefit payments, changes in present values during the period, and other disclosures on sustainability, though they differ on the details and the format of the statement. They would go about this in different ways, however. The biggest differences between the two views concern when a liability should actually be booked and how much of a liability to recognize.

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