Generational accounting is a method of measuring the fiscal burdens facing current and future generations. Generational accounting considers how much each adult generation, on a per person basis, is likely to pay in future taxes net of transfer payments, over the rest of their lives.

Laurence Kotlikoff Laurence Jacob Kotlikoff (born January 30, 1951) is a Professor of Economics at Boston University, a William Warren Fairfield Professor at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the Natio ...

's individual and co-authored work on the relativity of fiscal language demonstrates that conventional fiscal measures, including the government's deficit, are not well defined from the perspective of

economic theory Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

. Instead, their measurement reflects economically arbitrary fiscal labeling conventions. "Economics labeling problem," as Kotlikoff calls it, has led to gross misreadings of the fiscal positions of different countries. This starts with the United States, which has a relatively small

debt-to-GDP ratio In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured i ...

, but is, arguably, in worse fiscal shape than any developed country. Kotlikoff's identification of economics labeling problem, beginning with his 1984 ''Deficit Delusion ''article in ''

The Public Interest ''The Public Interest'' (1965–2005) was a quarterly public policy journal founded by Daniel Bell and Irving Kristol, members of the loose New York intellectuals group, in 1965.Gillian Peele, "American Conservatism in Historical Perspective", in ' ...

'' led him to push for generational accounting, a term he coined and that provides the title for his 1993 book, ''Generational Accounting''.

History

In 1991, Kotlikoff, together with

Alan Auerbach Alan J. Auerbach (born in 1951) is an American economist. He is currently the director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley. He received his undergraduate degree in economics and ...

and Jagadeesh Gokhale, produced the first set of generational accounts for the United States. Their study demonstrated a major

fiscal gap The fiscal gap is a measure of a government's total indebtedness proposed by economists Laurence Kotlikoff and Alan Auerbach, who define it as the difference between the present value of all of government's projected financial obligations, includin ...

separating future government spending commitments and its means of paying for those commitments, portending dramatic increases in the lifetime net tax burdens facing young and future generations. The generational accounting and fiscal gap accounting developed by Auerbach, Gokhale, and Kotlikoff has become an increasingly standard means of assessing the sustainability of

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...

and how different countries intend to treat their next generations. Recent generational accounting by the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...

and fiscal gap accounting by Kotlikoff confirm the truly severe long-run fiscal problems facing the US. Aggregating these remaining lifetime net tax payments of adults and subtracting them from the fiscal gap reveals how much today's and tomorrow's children must pay to resolve the country's fiscal gap if current adults don't pay more, on net. This residual burden facing today's and tomorrow's children is allocated to them in proportion to their projected levels of lifetime labor income. I.e., if each successive generation of children is expected to experience, on average, a 1 percent higher level of lifetime earners, generational accounting allocates to successive generations net lifetime tax payments that are 1 percent higher. Neither fiscal gap accounting nor generational accounting are perfect measures of

fiscal sustainability Fiscal sustainability, or public finance sustainability, is the ability of a government to sustain its current spending, tax and other policies in the long run without threatening government solvency or defaulting on some of its liabilities or promi ...

. Neither suffers from economics severe labeling problem. But both raise the thorny issue of how to discount future taxes and transfers when they are uncertain. The Social Security Trustees Report, in Table IVB6, provides an infinite horizon fiscal gap analysis each year for the

Social Security System Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...

by itself in which the actuaries use a 3 percent real discount rate. The size of the fiscal gap can be sensitive to the choice of the discount rate. But so is the size of the present value of future GDP against which it is compared. Hence, the ratio of the fiscal gap to the present value of GDP is much less sensitive to the choice of discount rate. It is this ratio that determines what adjustment is needed to eliminate the fiscal gap. In the US case, the fiscal gap is now 12 percent of the present value of GDP, suggesting that an immediate and permanent fiscal adjustment equal to 12 percent of GDP would be required to eliminate the fiscal gap.

Criticism

Fiscal gap and generational accounting have their critics. Some commentators believe the government faces no intertemporal budget, which is the foundation of the fiscal gap and generational accounting frameworks. They believe the government can meet its obligations by either cutting taxes and raising spending to stimulate the economy by enough such that the endogeneous increase in taxes will more than pay for the initial loss in net revenues. Other critics believe generational accounting is based on specious arguments and a fundamental misunderstanding of government debt. Once such critique of generational accounting was published in 2009, stating that, "There is no evidence, nor any economic theory, behind the proposition that government’s spending ever need match receipts," and:

...Social Security as a (national) liability is an asset to the public, but claims have focused on liabilities without acknowledging the corresponding assets. Since the public debt can be eternal and need never be paid off, a net debt position for Social Security and Medicare can likewise be eternal. We now have two centuries’ experience of accumulated federal budget shortfalls with, predictably, no suggestion of government insolvency.
James K. Galbraith James Kenneth Galbraith (born January 29, 1952) is an American economist. He is currently a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. He is also a Senior Schol ...
, L. Randall Wray, and
Warren Mosler Warren Mosler (born September 18, 1949) is an American hedge fund manager and entrepreneur. He is a co-founder of the Center for Full Employment And Price Stability at University of Missouri-Kansas City. and the founder of Mosler Automotive. Mosl ...
, 2009
"The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare,"
Public Policy Brief, No. 98, The Levy Economics Institute of Bard College.

References

Footnotes

Bibliography

Laurence J. Kotlikoff Laurence Jacob Kotlikoff (born January 30, 1951) is a Professor of Economics at Boston University, a William Warren Fairfield Professor at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the Natio ...

, 1987. "Social security," '' The New Palgrave: A Dictionary of Economics'', v. 4, pp. 418–20. * _____, 1992. ''Generational Accounting: Knowing Who Pays, and When, for What We Spend'', The Free Press
Description
and revie

extrac

* Alan J. Auerbach, Jagadeesh Gokhale and Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy ," ''Journal of Economic Perspectives'', 8(1), pp
73–94.
* Robert Haveman, 1994. "Should Generational Accounts Replace Public Budgets and Deficits?" ''Journal of Economic Perspectives'', 8(1), pp
95–111.
* John Sturrock, 1995. ''Who Pays and When? An Assessment of Generational Accounting''. US Congressional Budget Office.
Preface, contents, & links by chapter
* Peter A. Diamond, Peter Diamond, 1996. "Generational Accounting and Generational Balance: An Assessment," ''National Tax Journal'', 49(4), pp
597–607
* Laurence J. Kotlikoff, 1997. "Reply to Diamond's and Cutler's Reviews of Generational Accounting'', ''National Tax Journal'', 52(2). pp
303–14
* Willem H. Buiter, 1997. "Generational Accounts, Aggregate Saving and Intergenerational Distribution," ''Economica'', N.S., 64(256)
pp. 605–26.
* Laurence J. Kotlikoff and Bernd Raffelhüschen, 1999. "Generational Accounting around the Globe," ''American Economic Review'', 89(2), pp
161–66.
* Alan J. Auerbach, Laurence J. Kotlikoff, and Willi Leibfritz, 1999. ''Generational Accounting Around the World.'' 534 pp
Preview.
* Rowena A. Pecchenino1 & Kelvin R. Utendorf, 1999. "Social Security, Social Welfare and the Aging Population," ''Journal of Population Economics'', 12(4), pp. 607–23.
Abstract.
* Holger Bonin, 2001. ''

Generational Accounting Generational accounting is a method of measuring the fiscal burdens facing current and future generations. Generational accounting considers how much each adult generation, on a per person basis, is likely to pay in future taxes net of transfer p ...

: Theory and Application''. Springer
Preview.
*

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...

, 2001. "Generational Accounting." as lectur
outline.
Simple as ABC. * Laurence J. Kotlikoff and Scott Burns, 2005. '' The Coming Generational Storm: What You Need to Know about America's Economic Future''. MIT Press
Description
and chapter-preview links, p
vii.
* Jagadeesh Gokhale & Kent A. Smetters, 2006. "Fiscal and Generational Imbalances: An Update" in

James M. Poterba James Michael "Jim" Poterba, FBA (born July 13, 1958) is an American economist, Mitsui Professor of Economics at the Massachusetts Institute of Technology, and current NBER president and chief executive officer. Early years Poterba was born in N ...

, ed., ''Tax Policy and the Economy'', v. 20, ch. 6, pp
193–223.
MIT Press. * Rudy Penner, 2007
"Taxes and the Budget: What is Generational Accounting?"
in ''The Tax Policy Briefing Book: A Citizens' Guide for the 2008 Election and Beyond''. Tax Policy Center. * US Government Accountability Office. ''2008 Financial Report of the United States Government''
p. 40, Note 23
, with estimated present value of future expenditures in excess of future revenue

* John B. Shoven, ed., 2011. ''Demography and the Economy'', University of Chicago Press. Scroll-dow
description
an
preview
ch. 4–6 & 8.

External links

relativity of fiscal language

first set of generational accounts
{{Generation Demographic economics Fiscal policy National accounts Public economics Retirement Social security in the United States