The following is a brief excerpt from James C. Capretta’s contribution to “Public Debt Sustainability: International Perspectives,” edited by Barry W. Poulson of the University of Colorado, John Merrifield formerly of the University of Texas at San Antonio, and Steve H. Hanke of Johns Hopkins University.
Current US budget processes are inadequate for addressing the nation’s increasingly difficult fiscal challenges. A major shortcoming is the absence of effective checks on unfinanced spending commitments that burden future taxpayers. The public perceives eligibility rules for major social welfare programs as approximating binding contractual obligations on the part of the government, and yet the budget process does not ensure that there will be sufficient revenue to cover the commitments that are accruing for program participants . Unanticipated cost increases can force additional public borrowing, tax hikes, or cuts in other government activities.
A potential direction for reform is more extensive use of accrual accounting measures to better inform the public and policymakers of the financial position of the government and to provide a basis for legislated, or automatic, solvency-improving adjustments to key programs. As a practical matter, in the US context, it is Social Security and Medicare that are most central to the nation’s fiscal challenge and also the top candidates for revised fiscal rules pegged to their accrued costs and expected receipts across generations.
In recent years, greater use of accrual accounting to help address defects in fiscal processes has been getting more serious consideration in countries with advanced economies. The motivation is to bring forward into decision-making the financial effects of current and previous government decisions which by their nature have substantial long-term implications. State-sponsored retirement programs and pension systems, such as Social Security, are regularly cited as requiring such a long-term focus because they are designed to improve financial security of multiple generations of participants. Accrual accounting also can be relevant for government-backed loans and insurance programs, as well as for public investments in physical or financial assets that might generate long-term returns or economic benefits.
What follows is an examination of accrual accounting and related fiscal rules and their possible use in the context of improved financial management of Social Security and Medicare, as well as the broader federal enterprise. The discussion begins with a review of why reform is necessary, followed by the overview of current accrual accounting practices in the context of social insurance programs. It concludes with potential reforms that merit further consideration and development.
