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'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. 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, 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 led him to push for generational accounting, a term he coined and that provides the title for his 1993 book, Generational Accounting.
In 1991, Kotlikoff, together with Alan Auerbach and Jagadeesh Gokhale, produced the first set of generational accounts for the United States. Their study demonstrated a major fiscal gap 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 and how different countries intend to treat their next generations. Recent generational accounting by the International Monetary Fund 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. 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 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.[1]
^James K. Galbraith, L. Randall Wray, and Warren Mosler, 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.
_____, 1992. Generational Accounting: Knowing Who Pays, and When, for What We Spend, The Free Press. Description and review [1] extract [2][permanent dead link].
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.
John Sturrock, 1995. Who Pays and When? An Assessment of Generational Accounting. US Congressional Budget Office. Preface, contents, & links by chapter.
Peter Diamond, 1996. "Generational Accounting and Generational Balance: An Assessment," National Tax Journal, 49(4), pp. .
Laurence J. Kotlikoff, 1997. "Reply to Diamond's and Cutler's Reviews of Generational Accounting, National Tax Journal, 52(2). pp. .
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: Theory and Application. Springer. Preview.
World Bank, 2001. "Generational Accounting." as lecture outline. Simple as ABC.
Jagadeesh Gokhale & Kent A. Smetters, 2006. "Fiscal and Generational Imbalances: An Update" in James M. Poterba, ed., Tax Policy and the Economy, v. 20, ch. 6, pp. 193–223. MIT Press.
Rudy Penner, 2007. 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 2009-01-30 at the Wayback Machine, with estimated present value of future expenditures in excess of future revenue. Chapter links. 2009-02-04 at the Wayback Machine
John B. Shoven, ed., 2011. Demography and the Economy, University of Chicago Press. Scroll-down description[permanent dead link] and preview, ch. 4–6 & 8.
External links
relativity of fiscal language
first set of generational accounts
February 20, 2023
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This article includes a list of general references but it lacks sufficient corresponding inline citations Please help to improve this article by introducing more precise citations March 2014 Learn how and when to remove this template message 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 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 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 but is arguably in worse fiscal shape than any developed country Kotlikoff s identification of economics labeling problem beginning with his 1984 Deficit Delusionarticle in The Public Interest led him to push for generational accounting a term he coined and that provides the title for his 1993 book Generational Accounting Contents 1 History 2 Criticism 3 See also 4 References 4 1 Footnotes 4 2 Bibliography 5 External linksHistory EditIn 1991 Kotlikoff together with Alan Auerbach and Jagadeesh Gokhale produced the first set of generational accounts for the United States Their study demonstrated a major fiscal gap 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 and how different countries intend to treat their next generations Recent generational accounting by the International Monetary Fund 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 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 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 EditFiscal 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 1 See also EditDemographic economics Dependency ratio Distribution economics Pensions crisis Wealth Economic analysis WelfareReferences EditFootnotes Edit James K Galbraith L Randall Wray and Warren Mosler 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 Bibliography Edit Laurence J Kotlikoff 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 review 1 extract 2 permanent dead link 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 amp links by chapter 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 Raffelhuschen 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 amp 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 Theory and Application Springer Preview World Bank 2001 Generational Accounting as lecture 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 amp Kent A Smetters 2006 Fiscal and Generational Imbalances An Update in James M Poterba 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 Archived 2009 01 30 at the Wayback Machine with estimated present value of future expenditures in excess of future revenue Chapter links Archived 2009 02 04 at the Wayback Machine John B Shoven ed 2011 Demography and the Economy University of Chicago Press Scroll down description permanent dead link and preview ch 4 6 amp 8 External links Editrelativity of fiscal language first set of generational accounts Retrieved from https en wikipedia org w index php title Generational accounting amp oldid 1140245721, wikipedia, wiki, book, books, library,
