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Entitlement Accounting, Not Demographics


Catching up on the WSJ, I came across an opinion piece by Ben Wattenberg, who surmised that the current entitlement crisis is one of demographics; that is, our fertility rates are not able to sustain payment obligations. Though generally the WSJ and the American Enterprise Institute — of which Mr. Wattenberg is a senior fellow — are good in their analyses, this argument is patently untrue.

A few days later, the WSJ ran a letter to the editor by a Mr. Walsh, who well summed up the problem with Wattenberg assertion.

Ben J. Wattenberg’s suggestion that the funding problems with Social Security are due to demographics is demonstrably false. A properly funded program of benefits works regardless of demographics if benefit amounts are not increased above what payments can support, and accumulated funds and related investment earnings are invested wisely and not diverted to other uses.

These basic conditions are at work in the private retirement sector, governed by Erisa, where demographics have had a relatively negligible effect on current funding levels. In the case of Social Security, the former condition has been routinely violated by politicians pandering for votes, while elimination of the latter condition was seen to by Lyndon Johnson (Mr. Wattenberg’s old boss) and the Democratic House and Senate at the time. Current entitlement practices lack basic and proper accounting for costs.

In short, we’ll have deficits in 2020 not because only because spending is too much, but also because their accounting methods allow them to record the costs incurred years prior (for instance in 2003) as expenses in 2020.

What Mr. Wattenberg is really saying is that the current shift in demographics has made it more difficult to tax current earners sufficiently to pay for the overpromised benefits of current beneficiaries and to compensate for government mismanagement.

I have written before on the crisis of Social Security and its lack of basic and valid accounting practices. Entitlement reform must consist of both fiscal restraint and acceptable and professional accounting.