Generational Accounts: A Meaningful Alternative to Deficit Accounting

This paper presents a set of generational accounts that can be used to assess the fiscal burden 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%. This means that if the fiscal burden on current generations is not increased relative to that projected from current policy (ignoring the just enacted federal budget deal) 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% larger than that facing newborns in 1989. The just enacted budget will, if it sticks, significantly reduce the fiscal burden on future generations. The calculations of generational accounts reported here are based solely on NIPA government receipts and expenditures, and reflect the age pattern of government receipts and payments as well as the projected substantial aging of the U.S. population.