Generational Accounts (GA) are a fiscal analysis tool designed to assess the long-term sustainability of government policy and the fiscal burden being shifted between current and future generations.
They are considered a meaningful alternative to traditional deficit accounting because the annual budget deficit is often a misleading indicator of the true generational stance of fiscal policy, as it can be easily manipulated by arbitrary accounting labels (e.g., labeling a tax a "loan" or a transfer a "return").
Generational Accounts address the core issue of intergenerational distribution of welfare more directly than the deficit.
📊 What Generational Accounts Measure
Generational Accounts measure, in present value, the net tax payments (taxes paid minus government transfers received) that each specific generation—both those currently alive and those yet to be born—is projected to make to the government over their remaining lifetime.
Key Concepts:
Net Present Value: All future tax payments and transfers are discounted back to the current year using a real interest rate to provide a comparable value today.
Net Tax: This is the difference between taxes paid to the government and transfer payments received from the government (like Social Security, pensions, and healthcare benefits).
5 Intertemporal Budget Constraint: The GA framework is based on the idea that the government's total liabilities must eventually be paid. The total present value of future government consumption plus current government net debt must equal the total present value of net payments from all current and future generations.
⚖️ Generational Imbalance
The most critical insight from Generational Accounting is the calculation of the fiscal burden on future generations.
Current Generations: Their projected remaining lifetime net taxes are calculated based on current policies.
Future Generations: The total fiscal burden that must be borne by all future generations is calculated as a residual—the amount needed to satisfy the government's intertemporal budget constraint after accounting for the current generations' payments and all future government consumption.
Generational Imbalance (GI): This is typically calculated as the ratio of the net lifetime payment required of a representative future-born individual versus a representative newborn individual today (adjusted for economic growth).
If the required net payment for future generations is significantly higher than for current newborns, it indicates that current policies are unsustainable and are imposing a substantial fiscal burden on the future.
🚫 Why Deficit Accounting Falls Short
The paper by Auerbach, Gokhale, and Kotlikoff argues that the standard budget deficit is a poor measure of the generational fairness and long-term sustainability of fiscal policy because:
Arbitrary Labeling: The deficit is sensitive to how the government chooses to label its receipts and expenditures. For example, changing the label of Social Security contributions from "taxes" to "loans" would drastically alter the measured deficit without changing the underlying economic burden on any generation.
Focus on the Short Term: The deficit measures only one year of flows, while Generational Accounts provide a forward-looking, lifetime measure of the fiscal impact.
Generational Accounts, by contrast, are invariant to these changes in accounting labels, making them a more reliable measure of the true intergenerational distribution of fiscal policy.
Would you like to see a simplified mathematical representation of the Government's Intertemporal Budget Constraint that forms the basis of Generational Accounts?
👍 That's an excellent question! The core of Generational Accounting is the Government's Intertemporal Budget Constraint (IGBC), which is essentially an accounting identity stating that all government obligations must eventually be paid for.
In a simplified, aggregate form, the IGBC can be written as:
🔍 Breakdown of the Equation
The equation is presented in terms of Present Value (PV), meaning all future financial flows (taxes, transfers, spending) are discounted back to the current year ($t$).
| Term | Represents | Description |
| $\mathbf{NW}_t$ | Net Wealth | The government's current net financial wealth (assets minus explicit debt) at time $t$. |
| $\mathbf{PVL}_t$ | Present Value (PV) of Living Generations | The total present value of the remaining net tax payments (Taxes minus Transfers) that all generations currently alive are expected to pay over the rest of their lives under current policy. |
| $\mathbf{PVG}_t$ | Present Value (PV) of Government Consumption | The total present value of all future government spending on goods and services (defense, public works, administration, etc.) forever. |
| $\mathbf{PVF}_t$ | Present Value (PV) of Future Generations | The total present value of net tax payments that all future-born generations must collectively pay to satisfy the constraint. |
🧠 The Role of the Constraint in Generational Accounts
The key principle is the "zero-sum" nature of the constraint: The resources available (left side) must equal the uses of those resources (right side).
The Generational Accounting methodology uses this equation to determine the fiscal burden on the unborn:
The analysts first estimate $\mathbf{PVG}_t$, $\mathbf{NW}_t$, and $\mathbf{PVL}_t$ based on current government policies, population projections, and economic assumptions (like the discount rate).
The term $\mathbf{PVF}_t$ is then calculated as the residual.
This residual ($\mathbf{PVF}_t$) is the collective amount the future must pay. By dividing this amount among all future generations (assuming an equal burden adjusted for growth), the Generational Imbalance is calculated, which compares the required net payment of a future-born individual to a current newborn.
The power of this formula lies in its label-invariance: it focuses on the underlying economic obligations regardless of whether a particular flow is labeled a "tax," a "transfer," or a "debt."
lan J. AuerbachUniversity of Pennsylvania and NBERJagadeesh GokhaleThe Federal Reserve Bank of ClevelandLaurence J. KotlikoffBoston University and NBE REXECUTIVE SUMMARY
Abstract
This paper presents a set of generational accounts that can be used to assess the fiscal burden current generations are placing on future generations. The generational accounts indicate, in present value, the net amount that current and future generations are projected to pay to the government now and in the future. These accounts can be understood in terms of the government's intertemporal (long-run) budget constraint. This constraint requires that the sum of generational accounts of all current and future generations plus existing government net wealth be sufficient to finance the present value of current and future government consumption. The generational accounting system represents an alternative to using the federal budget deficit to gauge intergenerational policy. From a theoretical perspective, the measured deficit need bear no relationship to the underlying intergenerational stance of fiscal policy. Indeed, from a theoretical perspective the measured deficit simply reflects economically arbitrary labeling of government receipts and payments. Within the range of reasonable growth and interest rate assumptions the difference between age zero and future generations in generational accounts ranges from 17 to 24%. This means that if the fiscal burden on current generations is not increased relative to that projected from current policy (ignoring the just enacted federal budget deal) and if future generations are treated equally (except for an adjustment for growth) the fiscal burden facing all future generations over their lifetimes will be 17 to 24% larger than that facing newborns in 1989. The just enacted budget will, if it sticks, significantly reduce the fiscal burden on future generations. The calculations of generational accounts reported here are based solely on NIPA government receipts and expenditures, and reflect the age pattern of government receipts and payments as well as the projected substantial aging of the U.S. population.
This constraint requires that the sum of generational accounts of allcurrent and future generations plus existing government net wealth besufficient to finance the present value of current and future governmentconsumption.The generational accounting system represents an alternative to usingthe federal budget deficit to gauge intergenerational policy. From a theoretical perspective, the measured deficit need bear no relationship to theunderlying intergenerational stance of fiscal policy. Indeed, from a theoretical perspective the measured deficit simply reflects economically arbitrary labeling of government receipts and payments.Within the range of reasonable growth and interest rate assumptionsthe difference between age zero and future generations in generationalaccounts ranges from 17 to 24%. This means that if the fiscal burden oncurrent generations is not increased relative to that projected from currentpolicy (ignoring the just enacted federal budget deal) and if future generations are treated equally (except for an adjustment for growth) the fiscalburden facing all future generations over their lifetimes will be 17 to 24%larger than that facing newborns in 1989. The just enacted budget will, if itsticks, significantly reduce the fiscal burden on future generations.The calculations of generational accounts reported here are basedsolely on NIPA government receipts and expenditures, and reflect theage pattern of government receipts and payments as well as the projected substantial aging of the U.S. population.I.
INTRODUCTIONThe federal deficit is widely viewed as the United States' number oneeconomic problem. Yet there is no consensus as to how to measure thedeficit. Some want to exclude the current social security surplus, otherswant to include the full value of the S&L bail out, and others are concerned about adjustments for unfunded government retirement liabilities, inflation, growth, and government acquisition and sale of assets.The debate has not been restricted to politicians. Economists haveplayed a major role in lobbying for their favorite definitions of the deficit(e.g., Feldstein, 1974; Eisner and Pieper, 1984).Of course, a lot is at stake in how one measures the deficit. Givencurrent policy, leaving out social security surpluses means whoppingdeficits through the 1990s, while adjusting for inflation and growth almost turns the officially defined deficit into a surplus. As the underlyingcredo of fiscal policy is to cut spending or raise taxes to make the deficitzero, the attention given to how to define the deficit is not surprising.The goal of setting the deficit to zero seems quite strange in light of our ncertainty about how the deficit should be measured. Ifwe are not surewhat the deficit is, how can we be sure it should be zero? Rather thancontinue debating the deficit's measurement, perhaps we should firstask what concept the deficit is supposed to measure and then determinea measure consistent with that concept.The conceptual issue associated with the word "deficit" is the intergenerational distribution of welfare. Specifically, how much are different generations paying to finance government consumption and tosubsidize each other? Unfortunately, from the perspective of economictheory, the deficit is an arbitrary accounting construct whose value hasno necessary relation to the question of generational burdens. As demonstrated by Kotlikoff (1984, 1988, 1989) and Auerbach and Kotlikoff(1987), from a theoretical perspective the government can run any fiscalpolicy it chooses while simultaneously reporting any size deficit orsurplus. It can do so simply through the choice of how it labels itsreceipts and payments. For example, the government can (and does)label workers' social security contributions "taxes" and retirees' socialsecurity benefits "transfers." Suppose, instead, the government labeledworkers' contributions "loans" to the government and retirees' benefits"return of principal and interest" on these "loans" plus an additional"old age tax" equal to the difference between benefits and the "returnof principal plus interest" on the "loans." In this case the reporteddeficit would be entirely different not only with respect to its level, butalso with respect to its changes over time.1 This is not an isolatedexample; every dollar the government takes in or pays out is labeled ina manner that is economically arbitrary.If the deficit has no intrinsic relation to generational policy, whatmeasure does? The answer according to economic theory is what weterm generational accounts. These are accounts?one for each generation?that tally up, in present value, the amount of receipts less payments the government can expect to collect from each generation overits remaining life span. These generational accounts are comprehensivein that they consider all receipts and payments collected from or paid toall federal, state, and local governments. In contrast to the deficit,generational accounts are invariant to changes in accounting labels.This may be seen, for example, by considering the alternative labelingof social security just discussed. For each generation the present valueof its social security "tax" contributions less its receipts of "transfers"1 The Economic Report of the President 1982?Appendix to Chapter 4 reports both the conventional deficit and the deficit that arises from defining social security contributions as"loans" to the government.
onsisting of social security benefits is identically equal to the presentvalue of its "old age tax."The generational accounts are discussed in the context of the government's intertemporal budget constraint, which states that the government's current net wealth plus the present value of the government'snet receipts from all current and future generations (the generationalaccounts) must be sufficient to pay for the present value of the government's current and future consumption. By comparing what the government is projected to take from current generations with the differencebetween its projected consumption expenditures and its current netwealth, one can estimate the amount that future generations will needto pay. Hence, the generational account approach indicates directly theburden on future generations imposed by increases in expenditures onexisting generations, including existing elderly generations. This "zerosum" feature of the government's intertemporal budget constraint(some generation has to pay for any benefit to another generation)imposes a useful discipline on fiscal analysis. If the government were toadopt the accounting framework developed in this study, it would berequired to specify the costs to be borne by future generations forprograms that help existing generations, and vice versa.The generational accounts can also be used to assess the effects onnational saving of programs to redistribute more or less to current generations. For example, a decision to lower Medicare benefits means an increase in the expected present value of net payments to the governmentby the existing elderly. The change in the present value accounts of eachelderly generation due to this policy represents the change in their lifetime resources. Using recent generation-specific estimates of the propensity to consume out of lifetime resources developed by Abel, Bernheim,and Kotlikoff (1991), one can consider the effect on national consumptionand national saving of such policy changes.The primary sources of data used in this study are the Bureau of theCensus' Survey of Income and Program Participation (SIPP), the SocialSecurity Administration's population projections, the Bureau of LaborStatistics Consumer Expenditure Surveys (from 1980 onward), and theNational Income and Products Accounts reported in the July 1990 Surveyof Current Business.The findings of this paper suggest a larger fiscal burden?17 to 24%larger?on future generations than the burden to be imposed on 1989newborns under current policy (ignoring the recently enacted federalbudget deal). These figures are adjusted for growth, i.e., the increase is17 to 24% above the increase in fiscal burden that would accompany trendgrowth. The assessment that future generations face 17 to 24% higher
et taxes over the course of their lifetimes suggests a significant generational problem. The recently enacted federal budget deal will, if it is notsubverted, substantially reduce, if not eliminate the additional burdenthat would otherwise be imposed on future generations.The paper continues in Section IIwith a more precise description bothof generational accounts and their relationship to the government's intertemporal budget constraint. Section III describes how one can use thegenerational accounts to assess the generational stance of fiscal policy.Section IV considers the relationship of each generation's account to itsown lifetime budget constraint. Section V provides a detailed description of the data sources and methodology used in calculating the generational accounts. Section VI presents our findings, including our policysimulations. Our findings should be viewed as preliminary becausethere are a number of aspects of our calculations that can be improvedwith the additional data that we are in the process of procuring. Wesimulate (1) the President's proposed capital gains tax cut, (2) eliminating the 1983 social security benefit cuts scheduled to go into effectaround the turn of this century, (3) growth in Medicare spending inexcess of the economy-wide growth rate, (4) the impact of the $500billion S&L bailout, (5) slower growth in government consumptionspending, and (6) the budget deal just enacted by Congress and signedby the President. Finally, Section VII summarizes our findings anddraws conclusions.II.
https://www.journals.uchicago.edu/doi/abs/10.1086/tpe.5.20061801
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