Posted by Guohua Huang[1]
Providing social benefits to the public is a critical responsibility of governments. However, concerns have been raised about the financial sustainability of social benefit policies in many countries. One recent IMF study[2] showed that, without further reforms, spending on age-related programs (pensions and health) would increase by 9 percentage points of GDP in advanced countries and 11 percentage points of GDP in less-developed countries, between 2015 and 2100. The fiscal consequences are potentially dire. Such spending increases could lead to unsustainable public debts, require sharp cuts in other spending by governments, or necessitate large tax increases that could stymie economic growth.
Even though the sustainability of social benefits is an important policy issue, there is no an international standard on how to appropriately account for the related liabilities and expenses. The International Public Sector Accounting Standards Board (IPSASB) has been criticized for not issuing any standards on this issue. For example, when assessing the suitability of IPSAS in the EU member states a few years ago, the European Commission stated that the coverage of IPSAS was incomplete, and expressed concerns about its applicability to some important types of government flows, such as taxes and social benefits. IPSASB’s oversight body, the Public Interest Committee, has been recommending IPSASB to focus its resources on social benefits and other key issues of public policy.
It is unfair, however, to blame IPSASB for overlooking such an important topic. Indeed, as early as 2004[3], the Board issued for comment a paper on Accounting for Social Policies of Governments. Later, it issued a further consultation paper and an exposure draft on social benefits. But it turned out that the subject was so complex that IPSASB was not able to reach a consensus on several key issues at that time. The Board resumed its work on social benefits in 2014 after another giant project, on the conceptual framework for public sector accounting, was completed.
Recently, IPSASB published the Exposure Draft (ED) 63, Social Benefits, to seek public comments. This paper defines social benefits quite narrowly compared to the broad coverage it adopted in 2004. Coverage is also narrower than in the IMF’s Government Finance Statistics (GFS). For example, state pensions, unemployment benefits and income support are covered by the new ED, but universal education and healthcare are excluded. The narrower definition reflects the lesson the Board learned from its previous failure to reach a consensus on this topic.
The ED also defines social benefit liabilities from a short-term perspective. Only the amount to be payed to beneficiaries before the next point at which the various eligibility criteria are required to be satisfied is recognized as a liability. For pension benefits, the eligibility criteria may include reaching retirement age, and being alive, among many other requirements.
The approach followed by IPSASB is very different from the one adopted by many economists who recognize a government’s social benefit liabilities based on long-term projections of these liabilities. While such projections are extremely useful and relevant for decision making, they may not comply with accounting principles. For example, projected obligations in the future are uncertain and may not be binding obligations, which are critical concepts in the definition of liabilities in accounting.
IPSASB believes that publication of this kind of long-term information could follow its Recommended Practice Guideline (RPG) 1: Reporting on the Long-Term Sustainability of an Entity’s Finances. These guidelines do not require long-term cash inflow/outflow projections to be reported as assets or liabilities in financial statements. The principles for recognizing such liabilities are set out in the new ED.
This ED is open for public comment until March 31, 2018.
[1] Senior Economist, Fiscal Affairs Department, IMF.
[2] Benedict Clements, et. al., 2015, The Fiscal Consequences of Shrinking Populations, IMF, SDN/15/21.
[3] IPSASB was called the Public Sector Committee at that time.
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