Earlier this month, the Congressional Budget Office released its “Updated Budget Projections: 2015 to 2025.” From that release, the media has widely reported that the projected budget deficit for 2015 is $486 billion.
A budget should tell us about the balance of revenue and expense within our government. This budget doesn’t. The Congressional Budget Office (CBO) portrays liabilities as assets, loans as income, and debt as nothing. The presentation of the government’s finances defies logic, and even the most lax accounting standards.
The biggest problem is of course the inclusion of the revenue and expense of Social Security. The budget process recognizes the revenue the day that it is collected, while holding the cost of future benefits off-balance sheet for decades.
As a result, CBO reported a system which generated $1.8 trillion in unfunded liabilities over 2014 as a $30 billion profit center. In the headline number, CBO rolls-up payroll taxes in revenue indistinguishable from income taxes. If the system collects more in payroll taxes than it spends in benefits, the excess revenue is a profit used to offset spending elsewhere in the budget.
This depiction of course is inconsistent with current law. As the Trustees note, “The Social Security Act prohibits expenditures from the OASI and DI Trust Funds for any purpose not related to the payment of benefits or administrative costs for the OASDI program.”
Social Security taxes are not general tax revenue.
It is a dubious claim to recognize payroll taxes as revenue at all. In exchange for the revenue that is collected, the Social Security system makes a promise to pay future benefits. When the government collects a dollar of payroll taxes, it makes a commitment to pay roughly a dollar of benefits in the future. That isn’t tax revenue. That transaction is what normal people call a loan.
The budget of the federal government is like you borrowing $100,000 from a bank and declaring that loan as income on your 1040. You wouldn’t do include this income on your personal return because overstating your income would cost you more in taxes. The government on the other hand has no disincentive to overstate its revenue. In fact, inflated revenue can be a trumpeted success.
While payroll taxes are recognized as general revenue today, the cost of future benefits is held off-balance sheet for decades. To give you some idea of how long these loans can stay off-balance sheet, the Veterans Administration continues to pay pension benefits from the Civil War!
To give you some idea of the magnitude, Social Security’s unfunded obligations grew by $900 billion, simply because we moved the clock forward by a year. That is effectively the interest due on the off-balance sheet loans.
In terms of 2014, roughly $877 billion (nearly a third of the total) claimed as revenue by CBO was really an off-balance sheet loan. If we included the $900 billion in the outlays of the government, the outlays would increase to nearly $4.5 trillion. Even under the most lax accounting standards, the reported deficit of $486 billion would balloon to more than $2 trillion. Assuming that we really will pay Social Security benefits, our government is spending about $2 for every $1 it collects.