Working Paper No. 12

Fiscal and Generational Imbalances and Generational Accounts: A 2012 Update

Official federal budget accounts are constructed exclusively in terms of current cash flows — receipts from taxes and fees and outlays on purchases and transfers. But cash-flows do not reveal economically relevant information about who benefits and who loses from government policies. Cash flows also do not reveal how changes in government’s policies redistribute resources within and across generations, including reducing the tax burden on today’s generations and increasing it on future ones. Because most government transactions are targeted by age and gender, the federal government can bring about large resource transfers across generations. Intergenerational resource transfers will grow larger as the composition of budget receipts and expenditures changes with relatively faster growth of age-and-gender-related social insurance program. Intergenerational redistributions across generations through federal government operations could substantially affect different generations’ economic expectations and choices and exert powerful long-term effects on economic outcomes.

This paper updates earlier calculations of generational accounts and fiscal and generational imbalance measures based on the Congressional Budget Offices’ March 2012 Budget Outlook Update. It finds (1) that the fiscal imbalance embedded in the federal government’s current law (Baseline) policies amount to 5.4 percent of the present value of future US GDP, or 11.7 percent of the present value of future payrolls. However, given past precedents, federal current-law policies are unlikely to be implemented.

The CBO’s Alternative fiscal scenario, which eliminates several current-law policies as is consistent with past Congressional practice would increase the fiscal imbalance to 9.0 percent of the present value of GDP or 19.7 percent of the present value of payrolls. Generational accounting calculations show that under both Baseline and Alternative policies today’s middle-aged workers would receive large federal transfers by way of present valued Social Security and Medicare benefits that their lifetime net tax burdens are almost fully eliminated.

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Jagadeesh Gokhale is a Senior Fellow at the Cato Institute.