Social Security: Reliance on Cash Flow Accounting and Projections Disguises an Inherent Upside Cash Flow Bias

The federal unified budget reports social security program results on a cash flow basis. Policy is established through projections of cash flows for 75 years into the future. This paper discusses how reliance on cash flow accounting and projections disguises an inherent upside cash flow bias that makes the program's finances appear better than they actually are and, when combined with the long-standing pay-as-you-go funding policy, leads to periodic solvency crises. The paper does not propose changing the budgetary accounting basis from cash to accrual but does explore the possible application of accrual accounting to the social security program for reporting purposes.