The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
www.clevelandfed.org/research/workpaper/index.cfm
Working P a ~ e r9103
GENERATIONAL ACCOUNTS: A MEANINGF'UL
ALTERNATIVE TO DEFICIT ACCOUNTING
by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff
Alan J. Auerbach is a professor of economics
at the University of Pennsylvania and an
associate of the National Bureau of Economic
Research; Jagadeesh Gokhale is an economist
at the Federal Reserve Bank of Cleveland; and
Laurence J. Kotlikoff is a professor of
economics at Boston University and an
associate of the National Bureau of Economic
Research. The authors thank Jinyong Cai,
Ritu Nayyar, Bash Hardeo, and Sharon Parrott
for excellent research assistance and Albert
Ando, David Bradford, William Gavin, and Mark
Sniderman for helpful comments. Jane
Gravelle provided a variety of critical data
and many useful discussions. Research
support from the National Institute of Aging
and the National Bureau of Economic Research
is gratefully acknowledged.
Working papers of the Federal Reserve Bank of
Cleveland are preliminary materials
circulated to stimulate discussion and
critical comment. The views stated herein
are those of the authors and not necessarily
those of the Federal Reserve Bank of
Cleveland or of the Board of Governors of the
Federal Reserve System.
March 1991
www.clevelandfed.org/research/workpaper/index.cfm
Abstract
This paper presents a set of generational accounts that can be used to
assess the fiscal burden that 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 percent. This means that if the fiscal burden on current
generations is not increased relative to that projected from current policy
(ignoring the federal budget enacted in 1990) 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 percent
larger than that facing newborns in 1989. The 1990 federal budget will, if it
sticks, significantly reduce the fiscal burden on future generations.
The calculations of generational accounts reported here are based solely
on government receipts and expenditures from the National Income and Product
Accounts (NIPA), and reflect the age pattern of government receipts and
payments as well as the projected substantial aging of the U.S. population.
www.clevelandfed.org/research/workpaper/index.cfm
I. Introduction
The federal deficit is widely viewed as the United States' number one
economic problem.
Yet there is no consensus on how to measure the deficit.
Some want to exclude the current Social Security surplus, others want to
include the full value of the savings and loan (S&L) bailout, and others are
concerned about adjustments for unfunded government retirement liabilities,
inflation, growth, and government acquisition and sale of assets.
has not been restricted to politicians.
The debate
Economists have played a major role
in lobbying for their favorite definitions of the deficit (e.g., Feldstein
[I9741 and Eisner and Pieper [1984]).
Of course, a lot is at stake in how one measures the deficit.
Given
current policy, leaving out Social Security surpluses means whopping deficits
through the 1990s, while adjusting for inflation and growth almost turns the
officially defined deficit into a surplus.
Because the underlying credo of
fiscal policy is to cut spending or raise taxes to make "the" deficit zero,
the attention given to the deficit's definition is not surprising.
The goal of setting the deficit to zero seems quite strange in light of
our uncertainty about how the deficit should be measured.
what the deficit is, how can we be sure it should be zero?
If we are not sure
Rather than
continuing to debate the deficit's measurement, perhaps we should first ask
what concept the deficit is supposed to measure and then determine a 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 to
subsidize each other?
Unfortunately, from the perspective of economic theory,
the deficit is an arbitrary accounting construct whose value has no necessary
www.clevelandfed.org/research/workpaper/index.cfm
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 conduct any fiscal policy it
chooses while simultaneously reporting any size deficit or surplus.
It can do
so simply through the choice of how it labels its receipts and payments. - For
example, the government can (and does) label workers' Social Security
contributions "taxes" and retirees' Social Security benefits "transfers."
Suppose, instead, that the government labeled workers' 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 "return of principal plus interestn on the "loans."
In this
case, the reported deficit would be entirely different not only with respect
to its level, but also with respect to its changes over time.'
This is not an
isolated example; every dollar the government takes in or pays out is labeled
in a manner that is economically arbitrary.
If the deficit has no intrinsic relation to generational policy, what
measure does?
The answer, according to economic theory, is what we term
generational accounts.
These are accounts
- one
for each generation
- that
tally, in present value, the amount of receipts less payments the government
can expect to collect from each generation during its remaining life span.
These generational accounts are comprehensive in that they consider all
receipts and payments collected from or paid to all 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 labeling of Social Security just discussed.
For
each generation, the present value of its Social Security "taxn contributions
www.clevelandfed.org/research/workpaper/index.cfm
less its receipts of "transfers" consisting of Social Security benefits is
identically equal to the present value of its "old age tax."
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's net receipts from all
current and future generations (the generational accounts) 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 difference between its projected consumption
expenditures and its current net wealth, one can estimate the amount that
future generations will need to pay.
Hence, the generational account approach
indicates directly the burden on future generations imposed by increases in
expenditures on existing generations, including the elderly generations
currently alive.
This "zero sum" 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 to adopt the accounting framework developed in this study, it would be
required to specify the costs to be borne by future generations for programs
that help existing generations, and vice versa.
The generational accounts can also be used to assess the effects on
national 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 government by
the existing elderly.
The change in the present-value accounts of each
elderly 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
www.clevelandfed.org/research/workpaper/index.cfm
(1991), one can consider the effect of such policy changes on national
consumption and national saving.
The primary sources of data used in this study are the Bureau of the
Census' Survey of Income and Program Participation (SIPP), the Social Security
Administration's population projections, the Bureau of Labor Statistics'
Consumer Expenditure Surveys (CES) from 1980 onward, and the National Income
and Product Accounts (NIPA) reported in the July 1990 Survey of Current
Business .
The findings of this paper suggest a larger fiscal burden
percent larger
- on
-
17 to 24
future generations than the burden to be imposed on 1989
newborns under current policy (ignoring the 1990 federal budget deal).
These
figures are adjusted for growth; i.e., the increase is 17 to 24 percent above
the increase in fiscal burden that would accompany trend growth. The
assessment that future generations face 17 to 24 percent higher net taxes over
the course of their lifetimes suggests a significant generational problem.
If
it is not subverted, the new federal budget deal will substantially reduce, if
not eliminate, the additional burden that would otherwise be imposed on future
generations.
The paper continues in section I1 with a more precise description of both
generational accounts and their relationship to the government's intertemporal
budget constraint.
Section I11 describes how one can use the generational
accounts to assess the generational stance of fiscal policy.
Section IV
considers the relationship of each generation's account to its own 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 policy simulations. Our findings
should be viewed as preliminary because a number of aspects of our
www.clevelandfed.org/research/workpaper/index.cfm
calculations can be improved with the additional data that we are now in the
process of procuring.
We simulate 1) the President's proposed capital-gains
tax cut, 2) eliminating the 1983 Social Security benefit cuts scheduled to go
into effect around the turn of the century, 3) growth in Medicare spending in
excess of the economywide growth rate, 4) the impact of the $500 billion SdrL
bailout, 5) slower growth in government consumption spending, and 6) the
budget deal enacted by Congress and signed by the President.
Finally,
section VII summarizes our findings and draws conclusions.
11. Generational Accounts
The term "generations" refers in this paper to males and females by
specific years of age.
The term "net payments" refers to the difference
between government tax receipts of all types (such as federal and state income
taxes) and government transfer payments of all types (such as Social Security
benefits, unemployment benefits, and food stamps).
Finally, all present
values reflect discounting at a pre-tax interest rate.
To make the generational accounts and their relationship to the
government's budget constraint more precise, we write the government's
intertemporal budget constraint for year t in equation (1):
D
(1
s-0
Q)
Nt, t-s
+
ENt,t++g
s-1
Q)
+wf-
1
L G j-1
~
n s-t
(l+rjIm
The first term on the left-hand side of (1) is the sum of the present value of
the net payments of existing generations.
The expression N
t,k
stands for the
present value of net remaining lifetime payments to the government of the
generation born in year k discounted to year t.
The index s in this summation
runs from age 0 to age D, the maximum length of life.
Hence, the first
www.clevelandfed.org/research/workpaper/index.cfm
element of this summation is Ntlt, which is the present value of net payments
of the generation born in year t; the last term is Nt,t-D, the present value
of remaining net payments of the oldest generation alive in year t, namely
those born in year t-D.
The second term on the left-hand side of (1) is the
sum of the present value of remaining net payments of future generations.
The
third term on the left-hand side, wgt, denotes the government's net wealth in
year t.
The right-hand side of (1) expresses the present value of government
consumption.
In the latter expression, Gs stands for government consumption
expenditure in year s, and r
stands for the pre-tax rate of return in year j.
Equation (1) indicates the zero-sum nature of intergenerational fiscal
policy.
Holding the right-hand side of equation (1) fixed, increased
(decreased) government payments to (receipts taken from) existing generations
mean a decrease in the first term on the left-hand side of (1) and require an
offsetting increase in the second term on the left-hand side of (1); i.e.,
they require reduced payments to, or increased payments from, future
generations.
The term N t l k is defined in equation (2):
-
In expression (2), TSsk stands for the projected average net payment to the
government made in year s by a member of the generation born in year k.
By a
generation's average net payment in year s, we mean the average across all
members of the generation alive in year s of payments made, such as for income
and Federal Insurance Contributions Act (FICA) taxes, less all transfers
received, such as from Old Age, Survivors and Disability Insurance (OASDI),
Aid to Families with Dependent Children (AFDC), Unemployment Insurance (UI),
www.clevelandfed.org/research/workpaper/index.cfm
etc.
The term P S s k stands for the number of surviving members of the cohort
in year s who were born in year k.
For generations born prior to year t, the
summation begins in year t.
For generations born in year k, where k>t, the
summation begins in year k.
Regardless of the generation's year of birth, the
discounting is always back to year t.
A set of generational accounts is simply a set of values of Nt,k, one for
each existing and future generation, with the property that the combined total
value adds up to the right-hand side of equation (1).
In our calculation of
the N t S k t sfor existing generations (those whose &1989),
we distinguish male
from female cohorts, but to ease notation, we do not append sex subscripts to
the terms in equations (1) and (2).
III. Assessing the Intergenerational Stance of Fiscal Policy
Once we have calculated the right-hand side of equation (1) and the first
term on the left-hand side of equation (I), we determine, as a residual, the
value of the second term on the right-hand side of equation (I), which is the
present value of payments required of future generations. We further
determine the amount that needs to be taken from each successive generation to
balance the government's intertemporal budget, assuming that each successive
generation's payment is the same up to an adjustment for real productivity
growth.
This growth-adjusted constant amount is what must be taken from
successive generations to maintain what Kotlikoff.(1989) terms "fiscal
balance."
One can compare this measure with the actual amount projected to be
taken under current policy from existing generations, particularly the
generation that has just been born.
In other words, these data provide the
answer to the question: Given the projected treatment of current generations
www.clevelandfed.org/research/workpaper/index.cfm
as reflected in the values of their Nt,k's, do we need to take substantially
more from future generations than we are planning (as reflected by current
policy) to take from current generations?
In particular, is Nt,t
substantially smaller than Nt,t+l under the assumption that all values of N
t,s
for s>t+l equal Nt,t+l, except for an adjustment for productivity growth?2
Note that our assumption that all values of Nt,, for s>t+l are equal,
except for a growth adjustment, is just one of many assumptions one could make
about the distribution across future generations of their collective net
payment to the government.
We could, for example, assume a phase-in of the
additional fiscal burden (which could be negative) to be imposed on new young
generations.
Clearly, this would mean that new young generations born after
the phase-in period has elapsed would face a larger (or possibly smaller) Nt,s
than we are calculating here.
Our purpose in assuming both 1) growth-adjusted
equal treatment of future generations and 2) that the Nt,,'s
of current
generations are those one would project under current policy is to illustrate
the potential intergenerational imbalance in fiscal policy and the potential
need for adjusting current fiscal policy.
Our intent is not to claim that
policy will necessarily deal with the intergenerational imbalance by treating
all future generations equally or, indeed, by putting all of the burden on
future generations.
Understanding the size of the Ntlk's for current generations and their
likely magnitude for future generations is not the end of the story with
respect to assessing the intergenerational stance or incidence of fiscal
policy.
As studied in Auerbach and Kotlikoff (1987), intergenerational
redistribution will alter the time path of factor prices and, thereby, the
intergenerational distribution of welfare.
Such changes in factor prices
result from changes in the supply of capital relative to labor.
But the
www.clevelandfed.org/research/workpaper/index.cfm
changes in the supplies of capital and labor can, in turn, be traced back to
changes in consumption and labor supply decisions, which are based on private
lifetime budget constraints.
As described in the next section, the Nt,k's
enter private budget constraints. Hence, knowing how their values change is
essential not only for understanding the direct effect of government policy on
the intergenerational welfare distribution, but also for assessing the changes
in factor prices that may result from the policy.
Thus, understanding fully
the incidence of intergenerational fiscal policy requires knowledge of changes
in the values of the Nt,k's arising from the policy.
Indeed, one of the future goals of this research is to consider how
policies other than those examined here might affect the values of the Nt,k's
for the elderly and other existing generations and to assess the impact of
such policies on national saving.
In a recent study, Abel, Bernheim, and
Kotlikoff (1991) used CES data to calculate average and marginal propensities
to consume of U.S. households according to the age of the household head.
We
intend to use these results to determine the U.S. consumption response to a
range of potential intergenerational fiscal policies.
A generation's
consumption response to the hypothetical policies will simply be calculated as
the change in the generation's N
t ,k
multiplied by the corresponding marginal
propensity to consume.
IV. How Do the Ntlk's Enter Private Budget Constraints?
The lifetime budget constraint of each generation specifies that the
present value of its consumption must equal its current net wealth, plus the
present value of its human wealth, plus the present value of its net private
intergenerational transfers, less the present value of its net payments to the
government, its Nt,k.
This section shows precisely how the NtSk's enter
www.clevelandfed.org/research/workpaper/index.cfm
private budget constraints and how we can use our estimates on the Nt,k's and
additional information to infer the extent of net private intergenerational
transfers.
For the generation born in year k, the year t remaining lifetime budget
constraint is
-
s
1
TI
s-t
x[Cs,k+ls,klPs,kj-t+ll+rj
k+D
(3)
The terms
-
Es,k. Is&,
and
fs,k
k+D-
=
S
1
~:,k+ s=tEs,kPs,k j=t+l
a
l+rj
--
Nt,k *
stand, respectively, for the average values
in year s of consumption, private net intergenerational transfers, and labor
earnings of the generation born in year k.
The term uptnk stands for the year
t net wealth of the generation born in year k.
This equation states that the
sum of the present value of the cohort's projected consumption and its net
intergenerational transfers equals the present value of its resources.
The
present value of its resources equals, in turn, its net wealth, plus the
present value of its labor earnings, less the present value of its net
payments to the government, Nt,k.
Data are available for estimating the
present value of a cohort's consumption, the present value of its labor
earnings, and its current net worth.
compare our estimates of N
t ,k
remaining lifetime resources.
Hence, in future work we intend to
with the projected present value of the cohort's
We will also use these data and equation (3) to
derive, as a residual, an estimate of the projected present value of the
cohort's net private intergenerational transfers.
As mentioned, in our actual calculations we distinguish generations by
sex as well as age in 1990.
Our calculated age- and sex-specific values for
the present value of intergenerational transfers include, therefore,
intragenerational transfers from males to females.
Hence, in determining the
www.clevelandfed.org/research/workpaper/index.cfm
magnitude of transfers that are truly intergenerational (across age groups) we
combine the calculated private transfers of male and female generations of the
same age.
This provides us with a statement of the net present value of
private transfers given by (received from) both the male and the female
members of a given generation to members of other generations.
In the previous section we discussed comparing the N
t ,k
* s of future
generations with N t P t , which is the net lifetime payments of the generation
that was born at time t. We also discussed comparing the N t g k * sof all
existing generations under current policy with their respective values under a
different policy.
These comparisons, which involve differences (either across
generations or across policies) in N t P k 1 s ,are invariant to the accounting
framework we are adopting, although the absolute values of the N t t k * sdepend
on our accounting framework.
To see this point, consider once again the labeling of Social Security
receipts and payments.
Although the U.S. government labels Social Security
contributions as "taxes" and Social Security benefits as "transfers," from the
perspective of economic theory one could equally well label these
contributions as "private saving" (invested in government bonds) and label the
benefits as the "return of principal plus interest" on that saving, less an
"old age tax" that would be positive or negative, depending on whether the
Social Security system was less than or more than actuarially fair in present
value.
Under either choice of labels, the right-hand side of the budget
constraint (3) would retain the same value, but the division of the right-hand
side between wPt and Nk , would change.
It is in this sense that the absolute
value of the Nk,t's depends on the accounting framework.
However, regardless
of which way one accounts for (labels) the Social Security system, the change
in the value of Nt,k from a policy change, such as a reduction in Social
www.clevelandfed.org/research/workpaper/index.cfm
Security benefits, would be the same.
Under the conventional labeling, the
change in the value of the Nt,k's would simply equal the reduction for
generation k in the time t present value of their receipts from Social
Security.
Under the "private saving less an old age taxn labeling, the change
in the value of the NtSk's would simply equal the increase for generation k in
the time t present value of their old age tax.
Although the change in the value of the NtSk's associated with a policy
change is invariant to the accounting convention (the choice of labels for
government receipts and payments), the same is not true for the government's
budget deficit.
The same change in policy will lead to different changes in
the reported budget deficit depending on one's choice of labels for government
receipts and payments.
For example, consider the impact of an equal reduction
in Social Security contributions and benefit payments under the two labeling
schemes for Social Security.
If the contributions are labeled "taxes" and the
benefits are labeled "transfers," this policy change will have no effect on
the budget deficit, since the change in "taxesn equals the change in
"transfern spending. In contrast, if Social Security contributions are
labeled "private saving" and Social Security benefits are labeled "return of
principal plus interest" plus "an old age tax," an equal and simultaneous
reduction in contributions and benefit payments will mean a larger "old age
taxn for elderly recipients and will imply a reduction in the budget deficit.
V. Calculating the N t l k 8 sand Other Components o f the Government and Each
Generation ' s In tertemporal Budget Constraints
A . Data Sources for Calculatin~Net Pavments
According to equation (2), estimating the values of the N
projections of net payments, the
Ts,k's
's requires
t,k
for D+lesZk, population proj actions,
www.clevelandfed.org/research/workpaper/index.cfm
the P s , k ' ~for D+ksZk, and the time path of interest rates.
Projections of
the population by age and sex are available from the Social Security
Administration through 2050, and we have extrapolated these projections
through the year 2100 in the course of a study of demographics and saving
(Auerbach, Cai, and Kotlikoff [1990]).
We use SIPP data to calculate the average 1984 values by age and sex of
each of the different types of government receipts and payments covered in
SIPP.
The SIPP sample size is roughly 16,000 U.S. households.
The SIPP is a
panel survey that reinterviewed respondent households eight times (every four
months) over the course of two years.
July 1983 and ended in July 1985.
calendar year of SIPP data.
The first wave of interviews began in
Thus, for 1984, there is a complete
The government receipts and payments in the SIPP
survey include federal and state income and FICA taxes, food stamps, AFDC and
WIC benefits, Supplemental Security Income (SSI), general relief, unemployment
compensation, Social Security retirement, survivor and disability benefits,
other welfare, foster child care, and other government transfers.
Denton
Vaughan (1989) provides a detailed analysis of the improvements in the
measurement of government receipts and payments in the SIPP as compared with
other surveys such as The Current Population Survey.
The major deficiency in SIPP's coverage of government receipts and
payments is with respect to Medicaid and Medicare health care payments.
To
determine the average amount of Medicare payments by age (the data are not
available by sex), we use Waldo et al.'s
expenditures by age.
(1989) calculations of average
Data on Medicaid expenditures by age and sex were
obtained from the Health Care Financing Administration (1990).
www.clevelandfed.org/research/workpaper/index.cfm
B. Determininp Net Pavments
The average v a l u e s of t h e r e c e i p t s and payments by age and sex c a l c u l a t e d
from SIPP and t h e Medicare d a t a a r e used only t o determine t h e values of these
r e c e i p t s and payments by age and sex r e l a t i v e t o t h a t of a base age-sex
category, which we take t o be 40-year-old
males.
Given t h e s e r e l a t i v e
p r o f i l e s , we determine our i n i t i a l year (1990) average v a l u e s of each type of
payment and r e c e i p t by age and sex by benchmarking a g a i n s t aggregate t o t a l s
reported i n t h e NIPA aggregate values of government r e c e i p t s and t r a n s f e r s .
We then assume t h a t t h e age- and sex-specific average values of these payments
and r e c e i p t s i n f u t u r e years equal those c a l c u l a t e d f o r 1990, a d j u s t e d f o r an
assumed growth r a t e .
To provide an example of t h i s procedure i n a simple two-period context
where t h e r e a r e only young and old, suppose t o t a l r e c e i p t s of a c e r t a i n type
a t a given d a t e equal $1,000 and suppose we know t h a t t h e average payment f o r
o l d people equals twice the average f o r t h e young.
t h e r e a r e 200 young and 150 o l d .
must s a t i s f y $1,000
-
Z x 200
+
Also suppose we know t h a t
Then t h e amount paid by each young person Z
Z x 2 x 150.
Solving t h i s equation f o r Z and
multiplying by 2 gives t h e amount paid on average by o l d people.
I f the
growth r a t e i s g , then the projected payment of t h e young ( o l d ) k periods from
now is
z
x (l+g)k 12 x
z
x (I+~)~].
More g e n e r a l l y , we denote by Rrnagi (RfaPi) t h e average value of t h e i t h
payment o r r e c e i p t made by (received by) an age a male (female) i n 1984
divided by t h e average value of t h e type i payment ( r e c e i p t ) made by 40-yearo l d males i n 1984.
Let Hi,t
denote t h e aggregate revenues (expenditures) of
type i received by (made by) t h e government i n year t (1990).
pa,i,t
and
Ef
Finally, l e t
i, denote, r e s p e c t i v e l y , t h e average values f o r males and
females of payment ( r e c e i p t ) i i n year t.
Then we have
www.clevelandfed.org/research/workpaper/index.cfm
Equation (4) states that total payments (receipts) of type i in year t equal
the average value of these payments (receipts) for 40-year-old males times the
cross product of the age-sex profile for payment (receipt) i and the
population by age and sex.
We use equation (4) to solve for i;D40, i,t.
values of the P a , i s t' s a 4 0 and the
Cfa,
p40,i,t by RrnaSiand RfaSi, respectively.
The
' s are obtained by multiplying
We assume that
papi,,
and
Lfa,i,s for s>t equal their respective year t values multiplied by an assumed
growth factor.
The term ?fs,k for males (females) in equation (2) is
determined by summing over i the values of
T-k,
i, (Gfs-k,
+).
Clearly, for certain types of payments and receipts, such as Medicare
benefits, the choice of the proper growth factor may be particularly
difficult.
But rather than choose one value, we present results for different
growth rate assumptions.
The same type of sensitivity analysis applies to the
choice of the interest rate to be used in the discounting.
While the absolute
magnitude of the terms in the government's intertemporal budget constraint are
sensitive to these assumptions, the assessment of the burden being placed on
future generations relative to that being placed on current generations
happens to be not very sensitive to these assumptions.
C. The Treatment of Labor Income Taxes
We determine the relative profile of total labor income by age and sex
from the SIPP data and apply this profile to aggregate labor income taxes.
The aggregate value of labor income tax payments is calculated as 80.4 percent
of total federal, state, and local income taxes, where 80.4 is labor's share
www.clevelandfed.org/research/workpaper/index.cfm
of net national product.
In calculating this figure, we assume that labor's
share of proprietorship and partnership income as well as its share of
indirect tax payments equals its share of net national product.
The resulting
figure for aggregate labor income taxes is $446.1 billion.
D.
*
We use information on labor earnings in the SIPP to infer the amount of
FICA taxes paid by each household member.
From these data we then determine
the relative profile of FICA tax payments by age and sex.
This profile is
benchmarked against aggregate social insurance contributions, including
contributions by government workers to their pension funds.
The 1989 value of
aggregate contributions for social insurance is $476.8 billion.
E. The Treatment of Capital Income Taxes
Taxes on capital income require special treatment for two related
reasons.
First, unlike other taxes, taxes on capital income may be
capitalized into the value of existing (old) assets.
of income and tax payments may differ.
Second, the time pattern
As a result, capital income taxes must
be attributed with care in order to ensure that they are assigned to the
proper generation.
If all forms of capital income were taxed at the same
rate, there would be no such problem.
All assets would yield the same rate of
return before tax (adjusted for risk) and each individual would face a rate of
return reduced by the full extent of the tax.
However, if tax rates on the
income from some assets, typically older ones, are higher than those facing
income from new assets (e.g., because of investment incentives targeted toward
new investment), a simple arbitrage argument (see, for example, Auerbach and
Kotlikoff [1987], chapter 9) indicates that the extra tax burden on the old
www.clevelandfed.org/research/workpaper/index.cfm
assets should be capitalized into these assets* values, reflecting their less
favorable treatment.
This suggests that the flow of capital income taxes
overstates the burden on new investment. On the other hand, the presence of
accelerated depreciation allowances works in the opposite direction, since
initial tax payments from new investment understate the long-run tax burden on
such investments.
Although current tax payments overstate the tax burden on
new capital by their inclusion of taxes that are already capitalized in the
value of existing assets, the understatement of the burden on new investment
works in the opposite direction.
We require a method that calculates the value of capitalized taxes and
corrects the flow of taxes for these two measurement problems.
provides such a method.
The appendix
To illustrate the nature of the correction, consider
the case of cash-flow taxation, in which assets are written off immediately.
A well-known result is that the effective marginal capital income tax rate
under cash-flow taxation is zero. However, taxes would be collected each year
on existing capital assets, and such assets should therefore be valued at a
discount.
Assigning these taxes to the assets* initial owners, rather than to
members of future generations who may purchase the assets, recognizes that
future generations may freely invest in new assets and pay a zero rate of tax
on the resulting income.
Our correction to actual tax payments should, in
this case, result in a zero tax burden on the income from new assets.
The principle underlying our treatment of intramarginal capital income
taxes and the discounting of other payments and receipts at pre-tax rates of
return is that one can express private intertemporal budget constraints in the
presence of government behavior as 1) the budget constraint that would prevail
in the absence of the government with 2) a single modification to the present
www.clevelandfed.org/research/workpaper/index.cfm
value of resources that equals Nttk, the present value of the generation's net
payment to the government. In other words, one can express private budgets in
terms of pre-tax prices less net taxes valued at pre-tax prices.
In the case
of our adjustment for intramarginal capital income taxes, we are simply
valuing capital at its pre-tax price and treating the capitalized value of
taxes as another payment required by the government from the owners of that
capital.
In allocating capital income taxes we 1) correct our estimate of future
capital income taxes to account for their inclusion of taxes on old capital
and the generational timing of capital income taxes, 2) use equation (4) and
the SIPP profile of private net wealth holdings by age and sex to allocate
total 1989 taxes on new capital by age and sex, 3) project future capital
income taxes by age and sex using the 1989 age- and sex-specific values
adjusted for growth, and 4) allocate to 1989 owners of capital as a one-time
tax payment the 1989 capitalized value of the excess taxation of older
capital. The allocation of this one-time tax by age and sex is based on the
SIPP profile of asset holdings by age and sex.
Note that in the budget
constraint of each existing generation, we value its holdings of existing
capital at market value plus the capitalized value of intramarginal taxes.
In these calculations, we set aggregate capital income taxes equal to
19.6 percent (capital's share of net national product) of total federal,
state, and local income taxes, plus federal, state, and local corporate taxes
(excluding the profits of the Federal Reserve System), plus estate taxes. The
resulting value of 1989 aggregate capital income taxes is $234.9 billion.
Using the method described in the appendix, we estimate that the flow of
capital income taxes in 1989 overstated the capital income tax burden on new
investment by $6.09 billion and that the capitalized value of excess taxes on
www.clevelandfed.org/research/workpaper/index.cfm
old capital equals $609 billion.
following manner.
These estimates are calculated in the
We take the value of nonresidential equipment and
structures plus the value of non-owner-occupied housing owned by taxable
investors (both of which are reported in the Federal Reserve Flow of Funds for
1989), $5,488.8 trillion, and multiply this by 11.1 percent, our estimate of
the tax-induced percentage difference between the market value and replacement
cost of these assets.
We allocate the $609 billion ($5,488.8 x .Ill) in
capitalized taxes as a one-time tax to those age- and sex-specific 1989
cohorts according to the SIPP profile of relative net wealth holdings by age
and sex.
F.
r
n
t
p
k
3
Another form of payment to the government is the seignorage it collects
on private holdings of money balances.
Net of the negligible costs of
printing money, the government collects, in each year, resources equal to the
real value of new money printed.
In holding this money, households forgo the
nominal rate of return available on other assets.
Our strategy for attributing seignorage to different generations may be
illustrated using the analogy of an excise tax on durable goods.
government levied such an excise tax.
Suppose the
Households would then spend more to
obtain durables, and would therefore face a higher imputed cost of using these
goods until they had depreciated or were sold.
If a durable good were sold
(tax free) in the future, it would command a price in excess of its
replacement cost, reflecting the arbitrage with respect to new durables facing
the excise tax.
A measure of the net fiscal burden imposed on the household
by the excise tax is the household's tax payment upon purchase less this
recoupment of the tax upon sale, discounted to the present.
In the same way,
www.clevelandfed.org/research/workpaper/index.cfm
we attribute the burden of seignorage to households of particular generations
by treating the entire acquisition of money balances as a payment to the
government and the disposition of money balances as a transfer from the
government.
This has the effect of imputing a cost equal to the nominal
interest rate on the holding of money balances, and also attributes to all
current and future generations taken together a total fiscal burden equal to
the present value of government receipts from printing money.
We add the present value of such seignorage payments to the present value
of other net payments in forming the Nt,k's.
Specifically, we project average
money balances held by each age- and sex-specific generation through the
remainder of its life and add each year's net acquisitions (positive or
negative) of the monetary base to the Nt,k's.
As with all of our
calculations, we have been careful to benchmark against national aggregates.
In this case, we have ensured that the sum of age- and sex-specific
generations' net acquisitions of the monetary base equals the Dec. 1988 to
Dec. 1989 change in aggregate base money, which is $21.6 billion.
G. Including: Excise Taxes in the N t , k h
Excise tax payments are not included in the SIPP data.
To determine the
amount of excise taxes paid by the age- and sex-specific generations, we use
the CES data.
We use these calculations as well to project each generation's
annual flow and present value of excise taxes.
Our benchmark value of
aggregate 1989 excise taxes of $414.0 billion equals the 1989 NIPA value of
total excise taxes, less total property taxes, plus business property taxes;
i.e., we include only those property taxes assessed on business.
We use the
U.S. Department of Commerce's (1987) share of business property tax
assessments in total (business plus residential) property tax assessments to
www.clevelandfed.org/research/workpaper/index.cfm
divide total property taxes between businesses and residences.
43.9 percent.
This share is
In determining the 1989 NIPA value of total excise taxes, we
include those state and local property and excise taxes listed in the NIPA
accounts as "Personal Tax and Nontax Receipts."
We do not, however, include
those nontax receipts that are included as part of "Personal Tax and Nontax
Receipts" as excise taxes.
Instead, we treat these items, which include
tuition and hospital charges, as a return to government assets.
H. Includin~Residential Pro~ertvTaxes in the Nt,k-' s
We treat residential property taxes as excise taxes on home ownership and
allocate these taxes by age and sex using an age-sex profile of relative house
values.
This profile was obtained from the SIPP data for 1984.
In this
calculation, house values for married couples were divided evenly between the
spouses. As in the case of other taxes, we benchmark average property taxes
by age and sex using the 1989 value of total residential property taxes, which
equals $62.4 billion, and we project future average property tax payments
using the 1989 age- and sex-specific averages with an adjustment for growth.
I. Treatment of Social Security and Other Government Transfers
We divide total government transfer payments excluding federal, state,
and local civil service, railroad retirement, and veterans' benefits into six
categories: OASDI (including Federal Supplementary Security Income), hospital
insurance (HI or Medicare), AFDC, general welfare (including Medicaid),
unemployment insurance (UI), and food stamps (including WIC).
We use the SIPP
data to determine relative profiles by age and sex of each of these categories
of government transfers. To determine average 1989 values.of these transfer
payments, we benchmark the relative profiles against the NIPA aggregates using
www.clevelandfed.org/research/workpaper/index.cfm
equation (4). The absolute average values of each type of transfer.payment by
age and sex in future years are assumed to equal their respective 1989 values
adjusted for growth.
The one exception to this procedure is with respect to
future Social Security benefits.
We make a rough adjustment for the impact of
the 1983 Social Security amendments on future benefits of the baby boom and
subsequent generations.
These amendments reduce future Social Security
benefits by 1) phasing in a two-year delay in the receipt of normal retirement
benefits and 2) subjecting an increasing share of Social Security benefits to
federal income taxation.
Our adjustment involves reducing the average Social
Security benefits of each new cohort who reaches age 65 in the year 2000 and
beyond.
The reduction in each year's post-age-65 benefit is 1 percent for
cohorts who are age 65 in the year 2000, 2 percent for cohorts who are age 65
in 2001, 3 percent for cohorts who are age 65 in 2002, etc., with a maximum
reduction of 15 percent.
Thus, cohorts who reach age 65 in 2014 or later
experience a 15-percent reduction in the average annual value of their postage-64 Social Security benefits relative to the growth-adjusted value of the
same Social Security benefits prevailing in 1989.
J
. Calculatin~~~
tne-
Consum~tion
Our procedure for projecting the future path of total government
consumption is to decompose total 1990 government consumption expenditures
into 1) expenditures on those aged 0-24, 25-64, and 65+ and 2) non-agespecific expenditures, such as d e f e n ~ e . ~We denote year t expenditures on
those aged 0 to 24 divided by the year t population aged 0 to 64 as
where y stands for young.
We denote
&,,,
gy,t,
and zo, as the corresponding year
t average government consumption expenditures on the middle-aged (those 25 to
64) and old (those 65 and older).
Finally, we denote
gt as
the year t level
www.clevelandfed.org/research/workpaper/index.cfm
of non-age-specific government expenditures divided by the total year t
population.
-
-
-
-
We assume that the values of g y y s ~
Cys.
g o , and gs for s>t
equal their respective year t values multiplied by a common growth factor.
Total government consumption expenditures in year s are then determined as
where Py,s, P m Y s , Po,,,
and Ps stand for the population of young, middle-aged,
old, and the total population in year s. We use the OECD's 1986 division of
total U.S. government consumption expenditures among the four expenditure
categories plus our benchmark value of aggregate expenditures, Gs9 to
determine the values of
-
-
-
-
h y t , gost, and gt.
The OECD's division of
U.S. government consumption expenditures was 29.1 percent on the young (aged
0-24), 6.0 percent on the middle-aged (aged 25-64), 7.1 percent on the old
(65+), and the remaining 57.8 percent on the total population.
Our measure of
Gt is the 1989 NIPA value of total government consumption expenditures plus
the value of civil service, military, and veterans' retirement, medical, and
disability benefits.
We include these additional payments as part of
government consumption rather than as transfer payments because they are part
of government compensation to its employees.
The resulting value for 1989
total government consumption expenditures is $1.142 trillion.
An important issue in considering government as well as private
consumption is the treatment of durable goods.
The proper economic treatment
involves imputing rent on private and government durables and including this
rent (and excluding expenditures on durables) in private and government
consumption, respectively. Except for housing, however, NIPA treats
www.clevelandfed.org/research/workpaper/index.cfm
expenditures on durables as current consumption.
While we follow the same
treatment of durable goods in this paper, future analysis will adjust for the
proper economic treatment of private and government expenditures on durables.
K.
Because we want our generational accounts and analysis of different
generations' private budget constraints to be consistent with NIPA data,
including the total (federal, state, and local) government deficit, we take as
our measure of 1989 total government net wealth net government interest
payments divided by the sum of 1) our assumed real interest rate and 2) an
assumed 5 percent inflation rate.4
Our measure of government net interest
payments is $79.4 billion smaller than the NIPA figure of $131.8 billion
because we categorize state and local nontax receipts as positive capital
income earned on state and local assets. Assuming a 6 percent real interest
rate, the 1989 value of government net wealth is -$571 billion.
h
L. ;
The 1984 SIPP data are used to determine the age- and sex-specific
relative wealth profile.
Specifically, we calculate the weighted-average
values of net wealth by age and sex for 1984 and normalize these values by the
weighted-average value of net wealth of 40-year-old males.
values of Qma and qfa, the relative age-sex wealth profile.
sector wealth in 1989 can then be written as
This provides
Total private-
www.clevelandfed.org/research/workpaper/index.cfm
where p40,
and
stands for the average wealth of a 40-year-old male in year t,
is total 1989 private net wealth.
for p 4 0 , t.
The corresponding values of
determined by multiplying p 4 0
Equation (6) may be used to solve
pa, a 4 0
by Q~~ and
and
qfa,,
are
gfj , respectively.
In using the SIPP data, we distribute household wealth to the owner of
that wealth, where the ownership is indicated.
In the case of married
couples, we allocate half of the household's total wealth to each spouse.
We
set future values of net wealth by age and sex equal to the 1989 values
adjusted for growth.
M. The Choice of Interest Rate
The government budget constraint given in equation (1) depends crucially
on the choice of the interest rate r that is used in discounting future flows
to and from the government sector.
If all such flows were certain and
riskless, it would.clearly be appropriate to use the government's borrowing
rate, essentially a risk-free rate, in our calculations.
Given that these
flows are only estimated, however, which rate is appropriate to use?
The answer to this question depends on what we mean by fiscal balance in
the presence of uncertainty.
On the one hand, there is a straightforward
argument that the government's actual borrowing rate is still appropriate.
Suppose, for example, that a future receipt has an expected value of x, but
that the true value of the receipt may turn out to be higher or lower.
If it
is higher, the government will have to borrow a bit more; if it is less, less
borrowing will be required. Assuming that the government's borrowing rate is
not affected by these fluctuations, the discounted values will cancel in a
calculation of expected discounted revenue, leaving the discounted value of
the expected revenue x in the budget constraint. Thus, if we wish to consider
www.clevelandfed.org/research/workpaper/index.cfm
the payments from future generations that we expect will be needed to provide
fiscal balance, the procedure based on expected flows discounted with the
government's borrowing rate is correct.
However, expected fiscal balance may not be the only valid measure, or
even the most informative measure, about fiscal incidence.
After all, raising
a future individual's fiscal burden by $100 in some cases and lowering it by
$100 with the same probability in others needn't be a matter of indifference
to the individual if he is risk averse.
If the increased burden is associated
with other negative news (as will be true, for example, if government revenue
needs to rise during recessions), then these deviations from expected revenues
will not cancel from the taxpayer's perspective.
To reflect this, we might
wish to discount future receipts with a higher discount rate that accounts for
this risk.
The effect will be to raise the level of receipts necessary for
fiscal balance to be achieved, reflecting the fact that the burden of
uncertain taxes exceeds their expected value.
Likewise, the treatment of
government spending and transfers should be adjusted for risk, although one
should use the same discount rate only if the fluctuations in such spending
have the same risk characteristics as taxes do.
In our simulations below, we make different interest-rate assumptions in
calculating fiscal balance in order to accommodate the alternative views just
discussed.
The first approach is to apply a low, risk-free rate to the
projected flows, in keeping with the view of fiscal balance as expected
balance.
The second is to apply a market rate, adjusted for risk, in our
discounting of all of the flows in the government's budget constraint.
This
approach is consistent with fiscal balance being satisfied in risk-adjusted
terms.
www.clevelandfed.org/research/workpaper/index.cfm
VI. Findings
A.
Tables 1 and 2 contain the generational accounts for males and females
for different combinations of growth-rate and interest-rate assumptions.
Tables la-c and 2a-c contain the same information for alternative assumptions
about population structure, the treatment of capital income taxation, and the
discount rate, which we will discuss after reviewing the results in the first
two tables.
All of these tables show positive values for the accounts of young and
middle-aged cohorts alive in 1989, indicating that these generations will, on
balance, pay more in present value than they receive.
For generations of
males aged 65 and older, the net present value of payments is negative.
This
primarily reflects the fact that older generations, whose members are
typically retired, can expect to pay relatively little in labor income taxes
and payroll taxes over the rest of their lives, while receiving significant
Social Security, Medicare, and retirement benefits.
For females, the
generational accounts are negative for those aged 55 and over.
The younger
age at which this occurs for women is attributable to the lower labor-force
participation rates of women and the fact that many women receive Social
Security benefits as dependents of older spouses.
In tables 1 and 2, the values of the accounts more than double between
age zero and age 25.
For example, in the case g-.0075 and r-.06 (which we
take as our "base case"), the age zero account for males is $73.7 thousand and
the age 25 account is $193.0 thousand.
This simply reflects the fact that 25-
year-olds are closer to their peak taxpaying years than are newborns. The
accounts are most negative around age 75.
account is -$41.5 thousand.
For the base case, the age 75
www.clevelandfed.org/research/workpaper/index.cfm
The bottom row of each table, labeled "Future Generations," indicates the
present value of amounts that males and females born in 1990 will pay, on
average, assuming that subsequent generations pay this same amount except for
an adjustment for growth.
for males.
For the base case, this amount is $89.5 thousand
This means that males born in 1990 will be greeted with a bill
from all levels of government of $89.5 thousand, which is 20.5 percent larger
than the bill facing newborns in 1989, adjusted for growth (the amount that
the 1989 newborns are expected to pay, on average [$73.7 thousand], times one
plus the growth rate [1.0075], or $74.3 thousand).
Males born in 1991 will
face a bill for $90.2 thousand, which equals $89.5 thousand multiplied by
1.0075; males born in 1992 will pay $90.8 thousand ($89.5 thousand times
1.0075 squared), and so forth.
For females born in 1990, the bill will be
$44.2 thousand, based on the assumption that future female and male "birth
bills" have the same ratio as those of age zero males and females in 1989.
Tables la-c (males) and 2a-c (females) present the same calculations
under different assumptions. Tables la and 2a show the results of assuming
that no further demographic change will occur in the United States, i.e., that
the population age distribution will be constant after 1990.
These tables are
helpful in understanding the fiscal impact of the continuing demographic
transition to an older population.
Assuming that the population structure
remains constant, the tables show that younger generations, those who will
bear the brunt of the fiscal burdens from the demographic shift, would be
better off.
This is particularly true for males.
Tables lb and 2b demonstrate the importance of our special treatment of
capital income taxes.
Treating all capital income taxes as marginal taxes on
new capital income lowers the fiscal burden on older living generations, since
these groups are no longer being assigned the reduction in capital values
www.clevelandfed.org/research/workpaper/index.cfm
associated with the inframarginal taxation of old capital. Very young living
generations would face a somewhat higher fiscal burden, since these groups
hold little capital and will face many years of somewhat higher marginal tax
rates.
On balance, the reduced capital income taxes facing older living
generations and the slightly increased capital income taxes facing younger
living generations imply a considerably larger burden on future generations.
For the base case parameters, accounts of future generations are now 33.3
percent (rather than 20.5 percent) larger than the growth-adjusted value for
newborns in 1989.
Thus, failure to take account of the capitalization of some
capital income taxes causes one to understate the viability of the current tax
structure by ignoring the taxes that will be collected on the income from
previously acquired capital.
As we indicated above, the choice of which discount rate to use in these
tables depends on how one interprets the concept of fiscal balance in the
context of uncertainty. The preceding tables have presented generational
accounts for a range around 6 percent, corresponding to our "high" interestrate assumption.
Tables lc and 2c repeat the exercise of tables 1 and 2, but
for a lower range of interest rates centered around 3 percent, closer to the
real government borrowing rate.
The most significant effect of this change is
to increase the measured burdens facing newborns, since these burdens are
based largely on discounted payments and receipts that will occur many years
hence.
However, the same conclusion reached above, that the burdens must rise
for future generations, still holds here.
The robustness of this last result is amplified by table 3, which
presents for a wide range of growth- and interest-rate combinations the
percentage difference in payments required from future generations. The table
indicates that for a range of reasonable growth- and interest-rate
www.clevelandfed.org/research/workpaper/index.cfm
assumptions, current policy implies that future generations will face larger
fiscal burdens than those faced by current age zero generations (adjusted for
growth).
For the base case, the difference is 20.5 percent.
For the low-
interest-rate case with the same rate of productivity growth (r-.03, g-.0075),
the percentage difference is somewhat larger, about 21.6 percent.
More
optimistic growth-rate assumptions do not materially affect the conclusion of
a roughly 20 to 22 percent larger (growth-adjusted) burden on future
generations as compared with that on current generations.
B.
1
Appendix tables 1 and 2 provide for current male and female generations a
breakdown of the accounts by different types of receipts and expenditures.
The growth and interest rates used in the tables are the base-case values.
All figures are present values.
For example, males who are 30 years old in
1989 will, on average, pay $194.5 thousand in present value to the government
over the course of their remaining lives.
This figure reflects the difference
between the $222.8 thousand in the present value of payments to the government
less the $28.3 thousand in the present value of receipts from the government.
The largest source of present-value payments is the $74.4 thousand in FICA and
other payroll taxes, followed by $69.6 thousand in labor income taxes, $38.4
thousand in capital income taxes, and $34.2 thousand in excise taxes. The
largest sources of present-value receipts are $14.3 thousand in Social
Security OASDI benefits, followed by $5.4 thousand in general welfare (which
includes Medicaid), $4.6 thousand in Medicare, and $2.3 thousand in
unemployment insurance benefits.
Appendix tables 3 and 4 further clarify the determinants of these present
values.
They detail, for different 1989 male and female generations, the
www.clevelandfed.org/research/workpaper/index.cfm
annual flows of payments and receipts (measured in constant 1989 dollars) that
members of these generations are projected
years in the future.
rn pay, on average, in specific
For a male who is 30 years old in 1989, total 1989 net
payments are, on average, $14,104.
His average net payment 30 years later
when he reaches age 60 is projected to equal $32,294.
The tables show clearly
the age pattern of the government's various payments and receipts.
For
example, OASDI benefits for a male who is 30 years old in 1989 are, on
average, only $106, but grow to $10,221 at age 80.
C. The Effect of Policv Changes on Generational Accounts
Tables 4 and 4a explore the impact on generational accounts of a variety
of alternative fiscal policies, assuming 6 and 3 percent rates of interest,
respectively. Both tables assume the base-case .0075 growth rate.
The tables
compare the generational accounts of newborn and future generations before and
after the change in policy.
Appendix tables 5 and 6 indicate the impact of
the various policies on the generational accounts of older generations,
assuming base-case parameter values.
Appendix tables 5a and 6a repeat the
analysis assuming a 3 percent interest rate.
Capital Gains Tax Cut
The first policy considered is the administration's 1989 capital gains
tax cut proposal.
Taxation's
In analyzing this proposal, we used the Joint Committee on
(JCT) revenue estimates; specifically, we raised or lowered
projected cohort-specific average capital income tax payments each year in the
future by a factor that would leave total projected capital income tax
payments in that year larger or smaller by the amount of revenue gain or loss
projected by the JCT.
The results of this experiment indicate that the
www.clevelandfed.org/research/workpaper/index.cfm
administration's proposal would place an additional burden in present value of
approximately $1,271 ($629) on each future generation of males (females).
Appendix tables 5 and 6 and 5a and 6a indicate that most of the benefits from
the capital gains proposal would accrue to currently middle-aged generations.
For example, assuming base-case parameters, 45-year-old males are, on average,
projected to receive roughly $600 in present value as a result of the capital
gains tax cut proposal.
No Reduction in Social Security
The next policy experiment involves a cancellation of the 1983 Social
Security amendments.
In this simulation, we do not reduce future Social
Security benefits of generations attaining age 65 in the year 2000 and beyond
according to the procedure described in this section.
The impact of reversing
the Social Security amendments is particularly strong for middle-aged men and
women.
According to appendix tables 5 and 6, for base-case parameters. 40-
year-old men would benefit by about $2,600, and 40-year-old women by
approximately $2,400, in present value from such a reversal in policy.
Faster Medicare Growth
The third policy we consider is faster growth in Medicare expenditures.
Rather than projecting current spending levels forward at the growth rate of
other spending, we assume that medical costs will continue to rise more
quickly than other government expenses.
In particular, we assume that the
rate of growth of Medicare expenditures is 2 percentage points higher than the
economy's growth rate for the 20-year period between 1990 and 2010.
The
experiment produces a sharp jump in the extra burden to be placed on future
generations: With base-case parameters, newborns in 1990 will face an extra
www.clevelandfed.org/research/workpaper/index.cfm
burden of $15.8 thousand for males and $7.2 thousand for females; these
figures translate into a 42.7 percent larger burden on future generations than
on current age zero generations, adjusted for growth.
The simulated Medicare
policy provides a sizable benefit to existing older generations.
For example,
65-year-old males are estimated to receive an additional $5.1 thousand in
present value from this policy option.
Given the extraordinary growth in health care spending in recent years,
one might well believe that this simulation represents a more realistic view
of current policy than our "current policyn projection, which assumes only
trend growth in Medicare.
Clearly, there are alternative views of what
constitutes the expected near- and longer-term treatment of current
generations.
Ideally, one would have information on the public's expectation
of the future treatment of current generations to guide in the formation of
the "current policyn projection.
Certainly, in assessing current policy,
there is no reason to restrict oneself to what is actually legislated. We
offer our "current policy" projection as an initial benchmark from which to
consider possibly more realistic assessments of the future treatment of
current generations.
Savings and Loan Bailout
The recent savings and loan debacle and bailout illustrates the
difficulties of measuring "the" deficit.
The episode has prompted debates
about whether bailout financing should be "off-budgetn and whether the funds
raised should "count" toward the Gramm-Rudman-Hollings targets.
Such
discussions are really irrelevant if the goal is to determine who will bear
the costs of this mammoth new government spending program.
To model this, we
assume that the government issues $500 billion of new bonds in 1990 to make
www.clevelandfed.org/research/workpaper/index.cfm
good the claims against the insolvent S a s , and raises taxes only on new
generations.
We treat the bailout essentially as the undoing of a casualty
loss, in that the current generations are assumed to be kept whole by the
bailout; i.e., the $500 billion simply offsets $500 billion in losses caused
by the insolvencies.
Tables 4 and 4a indicate that this exercise will cost
each 1990 newborn male $9.4 thousand assuming a 6 percent interest rate, and
$4.2 thousand assuming a 3 percent interest rate.
Slower Growth in Government Consumption
One of the goals of those who seek to improve the fiscal situation is to
"get spending under control."
We model this by simulating the effects of zero
growth in government consumption for a period of 10 years with the growth in
government consumption after the 10-year period occurring at the assumed
economywide growth rate.
For base-case parameters, the impact of this reduced
spending is to lower the burden of future generations substantially, by about
$24.7 thousand per male and $12.2 thousand per female.
The large impact of
this policy can be understood by considering the size of its effect with
reference to the terms entering the government's
constraint given in equation (1).
intertemporal budget
Under our base-case assumptions, the
present value of government consumption is $25.386 trillion, the present value
of payments by existing generations is $21.166 trillion, government net wealth
is $ -0.516 trillion, and the present value of payments by future generations
is $4.737 trillion.
The simulated 10-year policy of zero growth in government
consumption followed by trend growth means the level of government consumption
in year 10 and beyond is lower than under the "current policy" simulation.
The effect of this policy is to lower the present value of government
www.clevelandfed.org/research/workpaper/index.cfm
consumption by $1.307 trillion, which is sizable compared to what would
otherwise be the burden on future generations, namely $4.736 trillion.
The Government's New Budget Deal
We examine three alternative views of the recent budget deal.
The first
alternative, A, assumes that the changes made to taxes and spending will be
permanent; the second, B, assumes that only the reductions in government
consumption spending will be permanent; and the third, C, assumes that the
provisions will last for only five years, after which taxes and government
consumption spending will revert to the values they would have had without the
budget deal.5
The results indicate that the importance of the budget deal
depends very much on its duration.
If the deal is temporary, case C, future
male generations will benefit by $6.4 thousand, but if it is permanent, case
A, they will benefit by $39.7 thousand. The loss to current generations is
also quite sensitive to the duration of the new policy.
If kept in place, it
will, for example, mean a $4.3 thousand present value loss to current 35-yearold males.
If it is temporary, the loss to current 35-year-old males is only
about $900. Appendix tables 5, 5a, 6, and 6a indicate that the current
elderly will pay a considerable share of the total costs to current
generations of the new legislation, although this share differs depending on
the longevity of the policy.
In understanding the magnitude of the new budget deal, it may help to
consider its effects on the components of the government's intertemporal
budget constraint.
In the simulation(s) in which the budget deal is
permanent, the present value of government consumption falls by $1.262
trillion; in the temporary case, it falls by $175 billion.
In the permanent
www.clevelandfed.org/research/workpaper/index.cfm
simulation, the present value burden on existing generations rises by $864
billion; in the temporary simulation, it rises by $161 billion.
V I I . Summary
The ongoing debate about how to define the federal budget deficit is
symptomatic of the need for a proper conceptual framework for describing
generational policy.
Unfortunately, the budget deficit, no matter how it is
defined, cannot provide a proper assessment of generational policy.
As an
alternative to economically arbitrary budget deficits, this paper has provided
a set of generational accounts indicating the net present value of payments of
existing generations to the government. We have used these accounts and
additional data concerning the government's intertemporal budget constraint to
assess the magnitude of the fiscal burden being placed on future generations
by current generations and to consider the burden on future generations of a
set of hypothetical fiscal policies.
The findings suggest that unless policy
toward existing generations, including those who have just been born, is
substantially altered (for example, through a real adherence to the 1990
budget deal), future generations will face a roughly 20-percent larger net tax
burden over the course of their lifetimes than current newborns.
www.clevelandfed.org/research/workpaper/index.cfm
Footnotes
1. 1
Appendix to,
Chapter 4, reports
both the conventional deficit and the deficit that arises from defining Social
Security contributions as "loans" to the government.
2. Our question is related to that posed in recent empirical studies (e.g.,
Hamilton and Flavin [I9861 and Wilcox [1989]); it asks whether government debt
will explode given current policy. However, we address the question of
intertemporal government budget balance in a different and, in our view, more
satisfactory manner.
3. The fact that components of government consumption expenditures are
targeted toward specific age groups suggests including the present value of
's and the ESsk's in equation (3). In
such expenditures in forming the N
t,k
future work we intend to present the generational accounts both including and
excluding the present value of age-specific government consumption spending in
However, for the economic, as opposed to
forming the Nt ,k's and the Es
's of future generations compare with
accounting, questions of how t e N
t k
those of the current newborn generation
and how changes in policy will change
the values of the Nt,k's for existing generations, the inclusion or exclusion
of age-specific government consumption spending on existing generations is
irrelevant. The analysis of the differential incidence of redistributing
across generations the burden of paying for the government's consumption can
be conducted holding the generational pattern of government consumption
expenditures constant.
k'"'
4. For future work in which we will measure imputed rent on government
durables, we will also take account of government tangible assets using
measurements reported by Eisner and Pieper (1984) and Boskin et al. (1987).
5. In these simulations, we assume that total taxes are increased in 1991 by
$21.7 billion, in 1992 by $32.3 billion, in 1993 by $30.4 billion, in 1994 by
$35.1 billion, and in 1995 by $35.1 billion. The respective annual reductions
in total transfer payments are $3.4 billion, $5.9 billion, $8.4 billion, $11.4
billion, and $13.4 billion. Finally, the respective annual reductions in
total government consumption are $15.8 billion, $32.2 billion, $46.1 billion,
$62.7 billion, and $73.5 billion. These aggregate figures as well as the
composition of taxes and transfers across the different types of taxes and
transfers were obtained from Congressional documents describing the budget
deal.
www.clevelandfed.org/research/workpaper/index.cfm
References
Abel, Andrew, Douglas Bernheim, and Laurence J. Kotlikoff, "Does the
Propensity to Consume Increase with Age?," mimeo, 1991.
Auerbach, Alan J., "The Tax Reform Act of 1986 and the Cost of Capital,"
Journal of Economic Pers~ectives,1987, l(1) pp. 73-86.
Auerbach, Alan J., "Corporate Taxation in the United States," Brookinas Papers
on Economic Activity, 1983, 2, pp. 451-513.
Auerbach, Alan J., and Laurence J. Kotlikoff, Dvnamic_Fiscal, Cambridge
University Press, 1987.
Auerbach, Alan J., and James Hines, "Anticipated Tax Changes and the Timing of
h
m
n
Investment," in Martin S. Feldstein, ed., T
Capital Accumulation, Chicago, Ill.: Chicago University Press, 1987.
Auerbach, Alan J., Robert Hagemann, Laurence J. Kotlikoff, and Giuseppe
Nicoletti, "The Economics of Aging Populations: The Case of Four OECD
Economies," OECD Staff P a ~ e r s ,1989.
Auerbach, Alan J., Jinyong Cai, and Laurence J. Kotlikoff, "U.S. Demographics
and Saving: Predictions of Three Saving Models," forthcoming in Carne~ieV
y
, 1990.
Boskin, Michael J., Mark S. Robinson, and A. M. Huber, "Government Saving,
Capital Formation, and Wealth in the United States, 1947-85," NBER
Working Paper No. 2352, August 1987.
The Economic Report of the President 1982, Washington, D.C.: U.S. Government
Printing Office, 1982.
Eisner, Robert, and Paul J. Pieper, "A New View of the Federal Debt and Budget
Deficits," American Economic Review, March 1984, 74(1), pp. 11-29.
Feldstein, Martin S., "Social Security, Induced Retirement, and Aggregate
Capital Accumulation," Journal,
Sept./Oct. 1974,
82(5), pp. 905-26.
Hamilton, James D., and Marjorie A. Flavin, "On the Limitations of Government
Borrowing: A Framework for Empirical Testing," American Economic Review,
September 1986, 76, pp. 808-19.
Health Care Financing Administration, HCDA-2082 0
e
CCare. El ibles
s
, Fiscal Year 1989,
Washington, D.C.: U.S. Government Printing Office, 1990.
Kotlikoff, Laurence J., "From Deficit Delusion to the Fiscal Balance Rule Looking for a Sensible Way to Measure Fiscal Policy," NBER working paper,
March 1989.
Kotlikoff, Laurence J., "The Deficit is not a Meaningful Measure of Fiscal
Policy," Science, September 1988.
www.clevelandfed.org/research/workpaper/index.cfm
Kotlikoff, Laurence J., "Taxation and Savings - A Neoclassical Perspective,"
Journal of Economic Literature, 22, December 1984, 22, pp. 1576-1629.
Vaughan, Denton R., "Reflections on the Income Estimates from the Initial
Panel of the Survey of Income and Program Participation (SIPP),"
Department of Health and Human Services, Social Security Administration,
Office of Policy Research and Statistics, September 1989.
Waldo, Daniel R., Sally T. Sonnefeld, and David R. McKusick, "Health
Expenditures by Age Group, 1977 and 1987," Health Care Financiqg, Summer
1989, lO(4).
Wilcox, David W., "The Sustainability of Government Deficits: Implications of
the Present Value Borrowing Constraint," Journal of Money. Credit and
Bankinq, August 1989, 21, pp. 291-306.
U.S. Department of Commerce, Bureau of the Census, 1987 Census of Governments'
Taxable Pro~ertvValues, Washington, D.C.: U.S. Government Printing
Office, 1987.
www.clevelandfed.org/research/workpaper/index.cfm
Table 1
Accounts for Age Zero and Future Male Generations
Generation's
Age i n 1989
Future
Generations
Swrce: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table 2
Accounts for Age Zero and Future Female Generations
(thousands of dollars)
Generationls
Age i n 1989
Future
Generations
Source: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table l a
Acccnnts for Age Zero and Future Hale Generations
Population Age-Distribution Constant after 1989
(thousands of do1 Lars)
Cenerationls
Age i n 1989
Future
Generations
Source: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table 2a
Accovlts for Age Zero and Future Femele Generations
Population Age-Distrikrtion Constant a f t e r 1989
(thousands of dollars)
Generationls
Age i n 1989
Future
Generations
Source: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table l b
Accounts for Age Zero and Future Male Generations
No Intramrginel Capital Incane Tax
(thousands of dollars)
Generat ion's
Age i n 1989
r=.05
rz.06
r=.07
Future
Generat ions
105.3
81.2
64.9
Source: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table 2b
Accounts for Age Zero and Future Feimle Generations
No lntrenrerginel Capital Incone Tax
(thousands of dollars)
Generation* s
Age i n 1989
Future
Generat ions
Source: Authors* calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table l c
Accounts for Age Zero and Future Male Generations
Low Interestdate Range
(thousands of do1 lars)
Generationls
Age i n 1989
Future
Generations
Source: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table 2c
Accounts for Age Zero and Future Fenmle Generations
Low I n t e r e s t d a t e Range
(thousands of do1Lars)
Generat ion's
Age i n 1989
Future
Generat ions
Source: Authors1 calculations
www.clevelandfed.org/research/workpaper/index.cfm
Table 3
Percentage Difference i n Accounts
of Age Zero (Growth Adjusted) and Future Generations
Interest
Rate
g=0
g=.0025 g=.005
Source: Authorsr calculations
g=.OO75
gx.01
g=.0125 g=.015
g=.0175
gn.02
(r=.06, g=.0075)
and Future Male Generations under Alternative Policy Changes
27.9
94478
73325
= A l l changes are permanent
= Government expenditure reductions are temporary
= ALL changes are temporary
22.4
90754
73598
42.8
105252
73166
33.2
98930
73716
-12.7
64812
73716
-35.7
49099
-8.9
69512
75750
11.7
83101
73811
Current Budget Agreement
75750
Absolute Values and Percentage Difference i n Accounts of Age Zero
Table 4
Capital Gains No Reduction Faster Medicare 9500 b. SBL Slower Growth
Growth
Bailout
i n Gov. Cons.
Tax Cut
i n Soc. Sec.
Source: Authors1 calculations
A
B
C
20.5
89484
Future
Generat ions
Percentage
Difference
(growth adjusted)
73716
Age Zero
i n 1989
Current
Pol i c y
www.clevelandfed.org/research/workpaper/index.cfm
www.clevelandfed.org/research/workpaper/index.cfm
www.clevelandfed.org/research/workpaper/index.cfm
Appendix
The Allocation of Capital Income Taxes
As mentioned in the text, there are two related problems with using
capital income taxes as measured to determine the burden of capital income
taxation.
First, existing assets may have excess future taxes capitalized
into their values; such taxes should not be assigned to new investors even if
these taxes occur in the future.
On the other hand, the timing of tax
payments from new investment may have a different pattern than would an income
tax, meaning that the ratio of current annual tax payments to income may not
provide an accurate measure of the effective marginal tax rate facing new
investment.
In this .appendix, we derive the formula used to calculate the capitalized
value of taxes on existing capital and the correction needed to transform
total capital income tax payments into an estimate of capital income tax
payments on new investment. Our formula is based on the user cost of capital
approach (see, for example, Auerbach [1983]), which assumes that the marginal
product of capital equals the user cost of capital, C, where
where r is the investor's required after-tax return, 6 is the investment's
economic rate of depreciation, r is the investor's marginal tax rate, and z is
the present value of depreciation allowances.
measures.
We wish to calculate two
The first, which we denote by Q, is the tax-based discount on old
capital, which equals the difference between tax savings from depreciation
allowances per unit of new capital and those available per unit of existing
capital :
www.clevelandfed.org/research/workpaper/index.cfm
where zO is the present value of depreciation allowances per unit of old
capital.
Measured capital income tax payments are not based on the effective rate
of tax on new capital m, where
Instead they are based on an average tax rate, a, where
and b is the average current depreciation deduction per unit of total capital.
Comparing (A3) and (A4) indicates that we must correct measured taxes per unit
of capital by subtracting from a(C-6)
(A5)
A
=
the term A, where
(a-m) (C-6 ) .
To calculate the terms zO in (A2) and b in (A4), we must consider past
patterns of investment. Assume investment grows at rate n.
Then at date 0
(the present) the nominal amount of capital purchased at date -s was Ioe("*Is,
where x is the inflation rate.
If this investment has been written
off at the constant geometric rate $, the asset at date 0 has a basis of Ioe'
("+")s~+s
and receives depreciation allowances of $ times this basis.
total allowances on the existing capital stock K are
Thus,
www.clevelandfed.org/research/workpaper/index.cfm
Since the capital stock equals the sum of depreciated net investment, we have
Equations (A6) and (A7) imply
The present value of all depreciation allowances on old capital equals
the basis of each vintage multiplied by the present value of remaining
depreciation deductions on that vintage, or
A
where z is the present value of depreciation allowances per unit of
depreciated basis.
Substituting (A3), (A4), and (A8) into (A5) yields
Substituting (A9) into (A2) implies
Expressions (A10) and (All) may be simplified if we make the realistic (under
A
current tax law) assumption that z
- z; thus
www.clevelandfed.org/research/workpaper/index.cfm
and
We assume that 6n.08 and n=.03.
These values are roughly consistent with
the average depreciation rates and past growth rates for equipment and
structures (see Auerbach and Hines [1987]).
these calculations that r-.04.
We further assume for purposes of
For these values and for an inflation rate of
4 percent, depreciation allowances (the right-hand side of [A14]) provide
roughly the same present value as true economic depreciation (the left-hand
side of [A141) .
When r-v.04 and 69.08, we have from (A14) that e.16.
For our calculation of
the actual value of z based on this value of $, we assume p.05 to maintain
consistency with our other calculations.
important impact on the results.)
(Using p . 0 4 rather than .05 has no
In addition, we assume that the tax rate r
equals .32. This value is less than the statutory rate of .34, with the
difference reflecting the small difference between corporate and personal
statutory rates.
These assumptions lead to the values A-.00111 and Q-.Ill.
This value of Q is consistent with earlier direct calculations based on tax
provisions similar to those enacted in 1986 (Auerbach and Hines [1987]).
These fractions are multiplied by $5,488.8 billion, the value of depreciable
assets held by taxable investors in 1989, to arrive at the numbers cited in
www.clevelandfed.org/research/workpaper/index.cfm
the t e x t , namely, a $6.09 b i l l i o n subtraction from current t o t a l capital
income taxes and a $609 b i l l i o n capitalized burden on o l d capital.
89.5
Source: Authors' calculations
Future
Generations
Labor
Generation's
Net
Income FICA
Agein1989 Payrent Taxes Taxes
www.clevelandfed.org/research/workpaper/index.cfm
Capital
Excise Income Seigno- Property
Taxes Taxes rage
Taxes
Payments
OASDI
(thousands of do1 lars)
HI
Present Valws o f Reeeipts and Payrents
Welfare
AFDC General
Receipts
The Canposition of Male Generational Accounts (r=.06, g=.0075)
Appendix Table 1
UI
Food
Stanps
44.2
Source: Authors' calculations
Future
Generat ions
Labor
Generation's
Net
In c m FICA
Age i n 1989 Paynmt Taxes Taxes
www.clevelandfed.org/research/workpaper/index.cfm
Capital
Excise I n c m Seigno- Property
Taxes Taxes
rage
Taxes
Payments
OASDI
(thousands o f dollars)
HI
Present Values of Receipts and Payments
Receipts
g=.0075)
Uelfare
AFDC General
The Composition o f Femele Generational Accounts (r=.06,
Appendix Table 2
UI
Food
Stemps
Year
Age
Year
Cohort that i s
Net
Age 10 i n 1989 Payment
Age
Cohort that i s
Net
Age 0 i n 1989 Payment
Taxes
Incane
Labor
Taxes
lncane
Labor
www.clevelandfed.org/research/workpaper/index.cfm
FICA
Taxes
FICA
Taxes
Excise
Taxes
Excise
Taxes
Taxes
lncane
Capital
Taxes
Incane
Capital
Payments
Seignorage
Seignorage
Property
Taxes
Property
Taxes
OASDl
OASO 1
Average Amual Values of Receipts and Payments
HI
HI
The Components o f Male Generational Accounts (r=.06,g=.0075)
Appendix Table 3
Uelfare
AFOC
General
Welfare
AFOC
General
Receipts
UI
UI
Food
st-
Food
Stenps
Year
Year
Age
Year
Cohort that i s
Net
Age 40 i n 1989 Payment
Age
Cohort that i s
Net
Age 30 i n 1989 Payment
Age
Cohort that i s
Net
Age 20 i n 1989 Payment
Labor
Income
Taxes
Labor
Imane
Taxes
Labor
Imame
Taxes
www.clevelandfed.org/research/workpaper/index.cfm
FICA
Taxes
FICA
Taxes
Taxes
FICA
Excise
Taxes
Excise
Taxes
Excise
Taxes
Capital
Income
Taxes
Capital
Income
Taxes
Capital
Incame
Taxes
Seignorage
Sei gnorage
Sei gnorage
Property
Taxes
Property
Taxes
Property
Taxes
Appendix Table 3 (continued)
OASDI
OASDI
OASDI.
HI'
HI
HI
Welfare
AFDC
General
Uelfare
AFDC
General
Welfare
AFDC
General
Food
Stemps
Food
St-
Food
Stemps
rear
rear
rear
Age
rear
Cohort that i s
Net
Age 80 i n 1989 Paymcnt
~ g e
Net
Cohort that i s
Age 70 i n 1989 Payment
Age
Net
Cohort t h a t i s
Age 60 i n 1989 Paylnent
Age
Cohort that i s
Net
Age 50 i n 1989 Paymcnt
Labor
Income
Taxes
Labor
Income
Taxes
Labor
Incane
Taxes
Labor
Income
Taxes
www.clevelandfed.org/research/workpaper/index.cfm
FlCA
Taxes
FlCA
Taxes
FICA
Taxes
FICA
Taxes
Excise
Taxes
Excise
Taxes
Excise
Taxes
Excise
Taxes
Seignorage
Seignorage
Seignorage
Capita 1
Income SeignoTaxes
rage
Capi t s l
lncome
Taxes
Capital
lncome
Taxes
Capital
lncome
Taxes
Property.
Taxes
Property
Taxes
Property
Taxes
Property
Taxes
Appendix Table 3 (continued)
OASD 1
OASD l
OASD l
OASD l
Welfare
AFOC General
Welfare
AFOC
General
Welfare
AFOC
General
Welfare
AFOC
General
UI
U1
U1
UI
Food
Stanpa
Food
Stenps
Food
Stamps
Food
Stmps
www.clevelandfed.org/research/workpaper/index.cfm
Year
Age
Year
Cohort that i s
Net
Age 10 i n 1989 Paynrent
Age
Cohort that i s
Net
Age 0 i n 1989 Paynrent
Labor
Income
Taxes
Labor
Income
Taxes
www.clevelandfed.org/research/workpaper/index.cfm
Taxes
FICA
Taxes
FICA
Excise
Taxes
Excise
Taxes
Capit a t
Income
Taxes
Capital
Income
Taxes
Payments
Seignorage
Seignorage
Property
Taxes
Property
Taxes
OASDI
HI
g=.OOR)
Average Annual Values of Receipts and Payments
The Conponents of Femele Generational Accovlts (rr.06,
Appendix Table 4
Uel fare
General
AFDC
Uelfare
AFDC
General
Receipts
U1
UI
Food
St-
Food
Stenps
Year
Year
Age
Year
Cohort that i s
Net
Age 40 i n 1989 Payment
Age
Cohort that i s
Net
Age 30 i n 1989 Payment
~ g e
Cohort that i s
Net
Age 20 i n 1989 Payment
Labor
Inconw
Taxes
Labor
Inconw
Taxes
Labor
Incane
Taxes
www.clevelandfed.org/research/workpaper/index.cfm
FICA
Taxes
FICA
Taxes
FICA
Taxes
Excise
Taxes
Excise
Taxes
Excise
Taxes
Capital
Incane
T axes
Capital
Inconw
Taxes
Capital
Incane
Taxes
Seignorage
Property
Taxes
Property
Taxes
Taxes
rage
Seignorage
Property
Seigno-
Appendix Table 4 (continued)
MSOI
MSOI
HI
HI
Uelfare
AFDC
General
Welfare
AFDC
General
Welfare
AFDC
General
UI
UI
UI
Food
St-
Food
Stenps
Food
Stenps
Year
Year
Year
Age
Year
Cohort that i s
Net
Age 80 i n 1989 Paynmt
Age
Net
Cohort that i s
Age 70 i n 1989 Paynmt
Age
Cohort that i s
Net
Age 60 i n 1989 Paynmt
Age
Cohort that i s
Net
Age 50 i n 1989 Paynmt
Labor
Incane
Taxes
Labor
Incane
Taxes
Labor
Income
Taxes
Labor
Incane
Taxes
www.clevelandfed.org/research/workpaper/index.cfm
FICA
Taxes
FICA
Taxes
FICA
Taxes
FC
IA
Taxes
Excise
Taxes
Excise
Taxes
Excise
Taxes
Excise
Taxes
Capi t a l
Incane
Taxes
Capi t a l
Incane
Taxes
Capi t a l
Incane
Taxes
Seignorage
Seignorage
Seignorage
Capi t a l
~ncane SeignoTaxes
rage
Property
Taxes
Property
Taxes
Property
Taxes
Property
Taxes
Appendix Table 4 (continued)
OASDI
OASDI
OASDI
OASOI
HI
HI
HI
HI
Welfare
AFDC
General
Welfare
AFDC
General
Welfare
Gencral
AFDC
Welfare
AFOC
General
UI
UI
UI
UI
Food
St-
Food
Stenps
Food
Food
stamps
st-
Year
Taxes
Taxes
Income
Excise
Taxers
Capital
FICA
Taxes
Income
Seignorage
Property
Taxes
Appendix Table 4 (continued)
Labor
Source: Authors1 calculations
Age
Cohort that i s
Net
Age 90 i n 1989 P a m t
www.clevelandfed.org/research/workpaper/index.cfm
OASDI
HI
Uelf are
AFDC
General
UI
Food
St-
89.5
Future
Generations
Source: Authors1 calculations
Appendix Table 5
gr.0075)
r
90.8
94.5
105.3
98.9
64.8
Capital Gains No Reduction Faster Medicare S500 b. SBL Slouer Growth
i n Sac. Sec.
Growth
Bailout
inGov.Cons.
Tax Cut
(thousands of do1Lars)
(rr.06,
Alternative Policy Changes
Accounts f o r Age Zero and Future Hale Generations d
ALL changes are permnent
B: Government expenditure reductions are temporary
C: A L L changes are temporary
' A:
Current
Policy
Generation's
Age i n 1989
www.clevelandfed.org/research/workpaper/index.cfm
Current Budget ~greernent*
44.2
Future
Generations
Source: Authors' calculations
Appendix Table 6
44.9
46.5
51.4
48.9
Capital Gains No Reduction Faster Medicare $500 b. SgL
Tax Cut
i n Soc. Sec.
Growth
Bailout
(thousands of do1Lars)
Alternative Policy Changes
32.0
Slower Growth
inGov. Cons.
Accounts f o r Age Zero and Future F m l e Generations under
A l l changes are permnent
B: G o v e r m t expenditure reduct ions are tenporary
C: ALL changes are tenporary
* A:
Curennt
Policy
Generat f on's
Age i n 1989
www.clevelandfed.org/research/workpaper/index.cfm
24.6
A
34.9
B
C
41.1
Current Budget Agreement
Source: Authors1 calculations
Appendix Table 5a
250.8
259.0
272.9
253.9
217.9
Capital Gains No Reduction Faster Medicare $500 b. SBL Slower Growth
Grouth
Bailout
i n Gov. Cons.
i n Soc. Sec.
Tax Cut
(thousands of dollars)
Alternative Policy Changes
Accounts f o r Age Zero and Future Male Generations under
A: A l l changes are permanent
B: G o v e r m t expenditure reductions are temporary
C: A l l changes are temporary
249.7
Future
Generations
ik
Current
Policy
Generationls
Age i n 1989
www.clevelandfed.org/research/workpaper/index.cfm
202.2
A
231.8
B
C
246.5
*
Current Budset Agreement
112.5
Future
Generat ions
113.0
114.5
B: Goverrmnt expenditure reductions are temporary
C: A l l changes are tenparary
Source: Authors1 calculations
(thousands of do1 lars)
A1ternative Pol i c y Changes
Accounts f o r Age Zero end Future F m l e Generations under
Appendix Table 6e
117.1
114.4
98.2
Capital Gains No Reduction Faster Medicare $500 b. S&L Slower Growth
Tax Cut
i n Soc. Sec.
Growth
Bailout
i n Gov. Cons.
A: A l l changes are permanent
Current
Pol icy
Generationls
Age i n 1989
www.clevelandfed.org/research/workpaper/index.cfm
93.5
A
107.2
B
C
111.1
Current Budget ~greement*
@FedFRASER