Generational accounting
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Generational accounting is a method of measuring the fiscal burdens facing current and future generations. Generational accounting considers how much each adult generation, on a per person basis, is likely to pay in future taxes net of transfer payments, over the rest of their lives.
"Economics labeling problem," as Kotlikoff calls it, has led to gross misreadings of the fiscal positions of different countries. This starts with the United States, which has a relatively small debt-to-GDP ratio, but is, arguably, in worse fiscal shape than any developed country. Kotlikoff's identification of economics labeling problem, beginning with his 1984 Deficit Delusion article in The Public Interest led him to push for generational accounting, a term he coined and that provides the title for his 1993 book, Generational Accounting.
History
In 1991,
Aggregating these remaining lifetime net tax payments of adults and subtracting them from the fiscal gap reveals how much today's and tomorrow's children must pay to resolve the country's fiscal gap if current adults don't pay more, on net. This residual burden facing today's and tomorrow's children is allocated to them in proportion to their projected levels of lifetime labor income. I.e., if each successive generation of children is expected to experience, on average, a 1 percent higher level of lifetime earners, generational accounting allocates to successive generations net lifetime tax payments that are 1 percent higher.
Neither fiscal gap accounting nor generational accounting are perfect measures of
Criticism
Fiscal gap and generational accounting have their critics. Some commentators believe the government faces no intertemporal budget, which is the foundation of the fiscal gap and generational accounting frameworks. They believe the government can meet its obligations by either cutting taxes and raising spending to stimulate the economy by enough such that the
Other critics believe generational accounting is based on specious arguments and a fundamental misunderstanding of government debt. Once such critique of generational accounting was published in 2009, stating that, "There is no evidence, nor any economic theory, behind the proposition that government’s spending ever need match receipts," and:
...Social Security as a (national) liability is an asset to the public, but claims have focused on liabilities without acknowledging the corresponding assets. Since the public debt can be eternal and need never be paid off, a net debt position for Social Security and Medicare can likewise be eternal. We now have two centuries’ experience of accumulated federal budget shortfalls with, predictably, no suggestion of government insolvency.[1]
See also
- Demographic economics
- Dependency ratio
- Distribution (economics)
- Pensions crisis
- Retirement age, international comparisons
- Wealth § Economic analysis
- Welfare
References
Footnotes
- ^ James K. Galbraith, L. Randall Wray, and Warren Mosler, 2009. "The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare," Public Policy Brief, No. 98, The Levy Economics Institute of Bard College.
Bibliography
- The New Palgrave: A Dictionary of Economics, v. 4, pp. 418–20.
- _____, 1992. Generational Accounting: Knowing Who Pays, and When, for What We Spend, The Free Press. Description and review [1] extract [2][permanent dead link].
- Alan J. Auerbach, Jagadeesh Gokhale and Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy ," Journal of Economic Perspectives, 8(1), pp. 73–94.
- Robert Haveman, 1994. "Should Generational Accounts Replace Public Budgets and Deficits?" Journal of Economic Perspectives, 8(1), pp. 95–111.
- John Sturrock, 1995. Who Pays and When? An Assessment of Generational Accounting. US Congressional Budget Office. Preface, contents, & links by chapter.
- Peter Diamond, 1996. "Generational Accounting and Generational Balance: An Assessment," National Tax Journal, 49(4), pp. 597–607.
- Laurence J. Kotlikoff, 1997. "Reply to Diamond's and Cutler's Reviews of Generational Accounting, National Tax Journal, 52(2). pp. 303–14.
- Willem H. Buiter, 1997. "Generational Accounts, Aggregate Saving and Intergenerational Distribution," Economica, N.S., 64(256), pp. 605–26.
- Laurence J. Kotlikoff and Bernd Raffelhüschen, 1999. "Generational Accounting around the Globe," American Economic Review, 89(2), pp. 161–66.
- Alan J. Auerbach, Laurence J. Kotlikoff, and Willi Leibfritz, 1999. Generational Accounting Around the World. 534 pp. Preview.
- Rowena A. Pecchenino1 & Kelvin R. Utendorf, 1999. "Social Security, Social Welfare and the Aging Population," Journal of Population Economics, 12(4), pp. 607–23. Abstract.
- Holger Bonin, 2001. Generational Accounting: Theory and Application. Springer. Preview.
- World Bank, 2001. "Generational Accounting." as lecture outline. Simple as ABC.
- Laurence J. Kotlikoff and The Coming Generational Storm: What You Need to Know about America's Economic Future. MIT Press. Description and chapter-preview links, p. vii.
- Jagadeesh Gokhale & Kent A. Smetters, 2006. "Fiscal and Generational Imbalances: An Update" in James M. Poterba, ed., Tax Policy and the Economy, v. 20, ch. 6, pp. 193–223. MIT Press.
- Rudy Penner, 2007. "Taxes and the Budget: What is Generational Accounting?" in The Tax Policy Briefing Book: A Citizens' Guide for the 2008 Election and Beyond. Tax Policy Center.
- US Government Accountability Office. 2008 Financial Report of the United States Government, p. 40, Note 23 Archived 2009-01-30 at the Wayback Machine, with estimated present value of future expenditures in excess of future revenue. Chapter links. Archived 2009-02-04 at the Wayback Machine
- John B. Shoven, ed., 2011. Demography and the Economy, University of Chicago Press. Scroll-down description[permanent dead link] and preview, ch. 4–6 & 8.