WHICH WAY WILL PAULSON LEAN ON THIS CORE ISSUE?
Sir, The first test for Hank Paulson, the new Treasury secretary, will be a little-noticed government accounting dispute that could soon dwarf the Enron scandal. Last month, the Federal Accounting Standards Advisory Board backed a proposal that would require the federal government to account for Social Security and Medicare in the same way private industry accounts for retirement benefits.
The implications are staggering. Roughly speaking, unfunded obligations for Social Security and Medicare have increased 10 times more (up about Dollars 10,000bn) during the Bush administration than has our public debt (up "only" Dollars 1,000bn). Like executives at Enron, federal officials do not want the public to know about off-balance-sheet liabilities of this size.
How could unfunded obligations have risen so fast in the past five years? The Bush administration's main domestic accomplishment - the Medicare drug bill - added thousands of billions of dollars of unfunded promises to US finances. Also, the ageing of the baby-boom generation is about to have fiscal consequences. Their retirement and medical benefits, together with those of current retirees, already total more than Dollars 26,000bn and will rise even more when the boomers start retiring in the next few years.
Under Bush administration policies, how should Washington account for Social Security, Medicare and other entitlement programmes? By continuing to ignore these shortfalls or by confronting them? Which side will Mr Paulson choose: the feelgood budgeting of the administration or the rigorous private sector outlook his old firm, Goldman Sachs, always champions?
The core issue is whether government promises made to Social Security and Medicare beneficiaries should be counted as real economic commitments or just "scheduled" benefits that may be revoked at will by the government. How can politicians say your benefits are sacred while government accountants say they are only scheduled?
Some financial experts are leery of treating entitlement programme benefits as if they were binding, lest we reduce the federal government's flexibility to restructure Social Security and Medicare. Others, like us, think there will be no hope of fulfilling the government's promises unless everyone knows how expensive they are.
What does Mr Paulson think? In his Senate hearing, he promised to address the problems facing our entitlement programmes. But, to make good on this promise, he must first support accounting reform that will allow the country to understand how large those benefits have grown. Otherwise, he will be perpetuating the biggest government cover-up in history: hiding vast sums in off-balance-sheet debt.
Congressman, Tennessee 5th District,
Nashville, TN 37203, US