| | | | | | | Curiosity 14.2: What Is Generational Accounting? | | | | | | | | | | The size of our national debt is a misleading measure o possible burdens on future generations, mainly because the national debt measure does not incorporate financing obligations associated with promises the government has made regarding future spending. | | | | | | | | | | Most prominent among these promises are future expenditures on social security (i.e., pension payments) and Medicare (i.e., subsidies for medical costs). These programs are financed on a pay-as-you-go basis, which means that the current, working generation pays for benefits being enjoyed by older generations who have retired. (Since 1983, the working generation has through extra payroll taxes been building up a fund to help pay for its future benefits, but this fund is far too modest, so in effect we continue to operate on a pay-as-you-go basis.) The current generation has been promised that its benefits will be paid for by the following generation of workers. Notice that each generation is being taxed to pay for the preceding generation's benefits, rather than being taxed to pay for its own expected benefits. This system works well if the later generation can easily produce sufficient income to finance these promised benefits. | | | | | | | | | | In the past it has been easy for later generations to meet this promise, primarily because later generations have always had more and more productive workers than earlier generations. But what if there is a slowdown in population and productivity growth so that a later generation finds itself unable to meet this promise easily? This possibility might imply that the earlier generation is placing a burden on the later generation. | | | | | | | | | | Generational accounting is the name given to calculations designed to measure future taxes required to meet promised future government spending. These calculations suggest that the United States is facing a big problem. The demographics are such that when the current working generation (the baby bcomer generation) retires, there will not be enough workers in the following generation to make the financing of this promise realistic. If the current generation continues to pay only about a third of its lifetime income in taxes, future generations will have to pay over 80 percent of lifetime income in taxes to meet the intergenerational promises we have described! | | | | | | | | | | There is some justice in an intergenerational transfer if the higher productivity of the later generation is in part due to the higher capital stock passed on by the earlier generation. The numbers given here are toc extreme to be justified on these grounds, however, especially given the recent slowdown in productivity growth. Clearly, such high taxes are not collectible, implying that some change is necessary: (1) tax the current generation more heavily so that it is forced to pay for much more of its own future benefits; (2) increase immigration dramatically to increase the number of people working to produce the income required to meet these promises; or (3) do not meet the promises the most likely scenario. | | | | | |
| | | | | However, if the deficit spending is on things other than capital assets, such as Medicare and unemployment insurance, then the future generation will receive a smaller capital stock. If the economy is at full employment, more crowding out occurs, increasing the likelihood that future generations will be made worse off. The key feature, however, is the nature of the deficit spending. If the deficit spending is on consumption items rather than investment items, the present generation is "living it up" at the expense of a future generation that will receive a smaller capital stock. | | | | |
