Apr 26th 2012
By AccountingWEB Staff
A new study ‒ "The Effect of Accounting Information on Taxpayers' Acceptance of Tax Reform" ‒ suggests that if taxpayers had a different understanding of the financial sustainability of Social Security, they might be more willing to make sacrifices to reform the system.
But if taxpayers become too worried, so much so that they feel helpless, that willingness could begin to decline.
The study researchers, four professors from Northeastern University, suggest that providing Social Security information using the accrual basis would provide more clarity about the future of the sytem.
The study looked at the way Social Security financing has traditionally been reported every year, using the cash flow basis, versus another method that takes liabilities into account. Under the accrual basis system, the financial picture shows nearly $1.5 trillion of expenses over income. It also reflects the system's liability for future benefits at year's end to be about eight times greater than its trust fund.
Under the traditional method, the picture doesn't look as bleak. The upcoming 2012 annual report will say that the system last year collected more money than it paid out and that the trust fund amounted to more than $2.6 trillion, the American Accounting Association reported.
The study, reported in the spring Journal of the American Taxation Association, said taxpayers "are willing to accept a larger share of the burden required to reform the Social Security system as their concern about the future sustainability of the Social Security worsens." The study points out, however, that taxpayers must feel a "very high level" of concern for that willingness to kick in.
It also suggests that policy makers should consider the way finances are communicated to the public: "While this information may heighten taxpayers' concern about the sustainability of the system, it also appears to increase their acceptance of traditionally unpopular reform measures."
One hundred fifty-nine accounting undergrad and graduate students were used in the study. They were divided randomly into three groups and informed of the system's sustainability in different ways.
Cash basis group ‒ They were told the system's cash income for the previous year (2009) was $805 billion, that benefits and other costs were $625 billion, and that assets in the Social Security trust fund at year's end was $2,419 billion.
Accrual basis group – They were told that income was $805 billion, expenses were $1,705 billion, and the system's unfunded benefit obligation at year's end was $18,500 billion.
Control group – They were not given specifics about the previous year's finances. They were asked to make financial assessments and respond to reform proposals based on their knowledge of Social Security.
After being presented with a few paragraphs from the board of trustees' annual report that discussed sustainability over the next 10 years and into the future 75 years, the accrual basis group become far more concerned, the study shows.
The findings include:
- On a scale of one (strongly disagree with increasing Social Security tax rate) to seven (strongly agree), the accrual basis group averaged 4.35, about 25 percent higher than the mean for the control group, and about 20 percent higher than the means for the cash basis group.
- The accrual basis group was more willing to accept reform proposals to increase the Society Security tax rate and raise the retirement age for future retirees.
- When concern becomes extremely high, "when a crisis is believed to be so overwhelming as to induce feelings of helplessness," willingness to sacrifice begins to decline.
The researchers concluded: "If self-interested behavior does arise, Congress may need to act very soon to reform the Social Security and Medicare systems before younger taxpayers begin to believe the system is beyond repair."
More information about the study can be found on the American Accounting Association website.