Thursday, December 30, 2004

Everything You Wanted To Know, But Were Afraid To Ask...

About accrual accounting. The scrivener tutors the Axis of Ostrich:

....the Treasury has just published on its web site, albeit with very little publicity, the 2004 Financial Report of the United States Government. And in it we find a very different number for the amount of increase of the government's net liabilities during 2004.This number is $11.087 trillion ... with a "t". And, yes, that's just for one year.

So two numbers are published by the Treasury for the same thing -- the increase in the government's net liabilities during 2004 -- with a difference between them of $10.7 trillion. How can this be?

The difference is that of governmental accounting.The government computes its $412 billion deficit number using cash-basis accounting.

....Accrual-basis accounting recognizes the full current value of all future income that one obtains a legal right to receive, and of all liabilities one becomes legally obligated to pay. So if one receives $1,000 cash in exchange for committing to pay $10,000 in the future, a $9,000 net cost is recognized, rather than $1,000 of income.

As noted, the government requires that GAAP rules be used by all public corporations and all but the very smallest of other entities that have inventories or accruals -- except itself. The government reserves for itself the right to use cash basis accounting.

....But what about the government's accruals? What about the currently accrued future cost of the already promised benefits of Medicare, Social Security, military pensions, government employee pensions, and so on, all measured net against the accrued value of the future income taxes, Social Security taxes, Medicare taxes, and so on that have been established to pay them?

Well, for the last few years, as per a legal requirement pushed through Congress by fiscal reformers, the Treasury has published within its financial report, for informational purposes, and annual Asset and Liability Statement for the government that does follow GAAP rules, using accrual accounting.

And this statement shows the government's net liability increasing in 2004 by $11.087 trillion -- a good 27 times more than the official budget deficit.

Looking at the "Overall Perspective" summary on page 11 (.pdf) we can see what this increase is composed of. The significant items:

Medicare: $9.609 trillion

Social Security: $0.812 trillion

In other words, Medicare and Social Security are almost the entire problem.

Meaning, those promises will not be met.

No matter how much wailing and gnashing of teeth there is about the sacred 'trust fund'.

No matter how often the ostriches lift their heads out of the sand to say, 'What, me worry?'

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