February 6, 2005
Stop figuring out the math and decide from the heart
By Michael Granof 

Original story (requires free registration) available at the Dallas News website.

Here's a current events quiz. The federal government's long-term liability for Social Security is approximately:

a) $50 billion

b) $3.7 trillion

c) $5.2 trillion

d) $12.7 trillion

e) all of the above

The answer, as improbable as it is illogical, is "all of the above." But it can also be various amounts between the two extremes as well as some that are beyond them.

In fact, all of the numbers are perfectly legitimate and have been drawn from either the audited consolidated financial reports of the federal government or data provided by the Social Security Administration. And that's a problem for citizens following the ongoing debate over the Bush administration's plan to reform Social Security, because all sides can accurately use numbers to make their case.

The numbers are meaningful if used in an appropriate context and properly explained. Most likely, however, when introduced into the debate, they won't be.

Those who offer one number as opposed to the other do not warrant being charged with the type of accounting legerdemain that may imprison executives of Enron, WorldCom and Adelphia. But make no mistake about it: Their choice of numbers will be no less self-serving.

How can all of the numbers be valid? Consider first, the smallest: the $50 billion. This is the amount incorporated into the liability for "benefits due and payable" in the federal government's consolidated balance sheet. It's so small because the government classifies Social Security as an entitlement program and thereby accounts for it on a pay-as-you go basis. The only liability it reflects on its balance sheet is that which is currently due and payable to retirees.

By contrast, the $5.2 trillion liability, which is reported in the notes to the financial statements, is an actuarial value. Probably the most common measure of the liability, it is the difference between what the federal government expects to collect in payroll taxes and what it estimates it will have to disburse in benefits. It is the amount that the federal government could put in an interest-bearing bank account today and have enough to cover the shortfall between tax revenues and benefit payments.

Another popular measure is the $3.7 trillion. This value deducts from the $5.2 trillion the $1.5 trillion that the Social Security trust fund holds in assets. These assets are investments in U.S. government bonds. Therefore, from the perspective of the government as a whole they are the promises of the federal government to transfer cash from one of its pockets to another.

Like the actuarial obligation of a corporate pension fund, the Social Security liability depends on numerous assumptions. However, whereas a corporate pension fund liability takes into account the benefits to be paid only to employees who are currently members of the pension plan, the Social Security liability includes payments to and from all potential program participants – children, immigrants and even the unborn.

Thus, it is the product of a complex model that incorporates estimates of future births, deaths, number of immigrants, marriages, divorces, wages, interest and consumer prices – all for the next 75 years.

Change any one of these estimates and the liability increases or decreases dramatically. For example, the $5.2 trillion liability assumes a real interest rate of 3 percent annually. Increase this to 3.7 percent and the liability falls to $3.8 trillion; decrease it to 2.2 percent and it soars to $7.5 trillion. Extend the time horizon infinitely and the liability goes up to $11.9 trillion. Take into account only current participants and it swells to $12.7 trillion. Combine changes in two or more variables and the differences are even more dramatic.

Another question, perhaps most salient: Who cares what the magnitude of the Social Security liability is? Except to astronomers, who count stars and measure distances to the end of the universe, numbers with multiple sets of zeros have little cognitive significance. They are beyond our comprehension.

In the end, therefore, the fate of President Bush's proposals will be determined the usual way. Economic ideology and political power will trump the trillions.

Citizens should make their decisions based on political philosophies, not astronomical figures subject to manipulation. And here's a plea to both politicians and pundits: Spare us the numbers.

Michael H. Granof is an accounting professor at the The University of Texas at Austin's McCombs School of Business. His e-mail address is michael.granof@mccombs.utexas.edu.

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