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Generational Accounting: an International Comparison

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Generational Accounting: an International Comparison A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Leibfritz, Willi Article — Digitized Version Generational accounting: an international comparison Intereconomics Suggested Citation: Leibfritz, Willi (1996) : Generational accounting: an international comparison, Intereconomics, ISSN 0020-5346, Nomos Verlagsgesellschaft, Baden-Baden, Vol. 31, Iss. 2, pp. 55-61, http://dx.doi.org/10.1007/BF02927167 This Version is available at: http://hdl.handle.net/10419/140534 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu FISCAL POLICIES Willi Leibfritz* Generational Accounting: an International Comparison With rapidly rising government debt and ageing populations implying high contingent liabilities in public pension systems, the issue of longer-term fiscal developments is gaining importance. The question arises whether, and to what extent, future generations will be burdened by current policies. Generational accounting is a new approach to examining such issues and it is used more and more in the policy debate. 1 n contrast to the usual current budget indicators, paid by current generations must ultimately be paid I generational accounting is a long-term forward- by future generations. ''2 As the intertemporal budget looking approach which takes into account the net constraint is expressed in present value terms the present value of, for example, future public pension current level of debt may still remain positive and rise, obligations. Furthermore generational accounting but its rate of increase must be lower than the indicates that policy measures which have only discount rate so that its present value approaches marginal, or even zero, effect on current deficit zero. positions may have significant effects on inter- The comparison of generational accounts between generational equity. For example, an immediate and the various generations (i.e. annual birth cohorts) permanent increase in pension benefits financed by indicates the effect of current policies on different an increase in social security contributions does not generations. Generational accounting can also be affect the deficit although older living generations gain used as a tool to measure the effects of alternative from this measure while younger and future policies on different generations. If current policies are generations lose. "present-oriented", i.e. have a bias against future This article compares results for five countries for generations, this analytical framework may help to which such accounts are available on a comparable follow a more generationally-balanced approach. basis, namely the United States, Germany, Italy, The inter-temporal budget constraint implies that Sweden and Norway. It first describes the metho- the government's current net wealth plus all future dological framework, then presents the results, taxes paid to the government minus all future discusses the meaningfulness of generational transfers paid by the government (future net taxes) accounts as compared to other approaches and must cover all future government spending on goods finally draws the conclusions. and services2 The sum of future net taxes is split into an amount paid by all existing generations (annual The Methodological Framework cohorts of the current population) from the base year "Generational accounts indicate, in present value, onwards to the end of their lives and the remaining what the typical member of each generation can expect to pay, now and in the future, in net taxes ' See, for example, A. J. Auerbach, J. Gokhale and L. J. (taxes paid net of transfer payments received). Kot li ko ff: Generational accounts - a meaningful alternative to deficit accounting, NBER Working Paper, No. 3589, 1991; J. Generational accounting indicates not only what Gokhale, B. Raffenh0schen andJ. Walliser: The burden existing generations will pay, but also what future of German unification: a generational accounting approach, Federal Reserve Bank of Cleveland Working Paper, No. 9412, 1994; D. generations must pay, given current policy and the Franco, J. Gokhale, L. Guiso, L. J. Kotlikoff and N. government's intertemporal budget constraint. This Sartor: Generational accounting: the case of Italy, Banca d'ltalia, Temi di discussione, No. 171, 1992; Office of Management and constraint requires that those government bills not Budget: Budget of the United States Government: analytical perspectives, fiscal year 1995, U. S. Government Printing Office, Washington, D. C. 1994. * Head of the Public Economics Division of the Economics 2 A. J. Auerbach, J. Gokhale and L. J. Kotlikoff: Department of the OECD, Paris, France. The author would like to Generational accounts - a meaningful alternative to deficit thank Deborah Roseveare for comments and assistance on earlier accounting, in: The Journal of Economic Perspectives, Volume 8, drafts of this article. No. 1, Winter 1994. INTERECONOMICS, March/April 1996 55 FISCAL POLICIES amount which has to be paid by all future generations implies that if government consumption increases during their lives. Hence: without a corresponding increase in net taxes of existing generations (or if net taxes of existing Present value Stock of current generations are reduced without a corresponding of all future = government reduction in government consumption) net taxes of government net wealth future generations have to increase in order to keep consumption the government budget on a sustainable path. present value of + all future net tax In order to calculate such accounts for the annual payments of all cohorts of the population, the different effects of living generations government receipts and outlays on different age- groups have to be taken into account. For example, present value of labour income taxes and social security contributions + all net tax payments are paid during working years and pensions are of all future generations received during retirement. Generational accounting models attempt to consider all age-specific or in algebraic form: differences in households' tax payments (labour oo O ~ income taxes, capital income taxes, social security ~_~ Gs(l+r) t-s = W G + ~.~ Nt, t-s + ~ Nt, t+s contributions, indirect taxes) and transfer receipts $=t s=o s=l (pensions, welfare) or other government spending (health, education). For all other government revenues Where: and spending (for example, defence) uniform effects on age-groups are assumed. While in principle the k+D method is straightforward, in practice numerous Ts, k Ps,. (l+r) t's Nt, k = ~.~ simplifying assumptions have to be made. In s = max (t, k) particular, the age-specific distribution of tax payments and government spending is often difficult government consumption in period s GS to estimate in practice. Sometimes only taxes and WGt = government net wealth in the base year t current transfers are allocated by age (and sex) but (minus in the case of net debt) none of government purchases. As it is also difficult to present value in the base year t of all Nt, k = assess the real value of non-marketable government future net tax payments of the generation assets, the wealth variable is generally proxied by net born in year k government financial assets (or if negative net debt). ms, k average per capita net tax payments in year s of the cohort born in year k As the remaining lifetime net tax payments (Nt, k) of Ps, k = number of surviving members in year s living generations depend on the current age of the of the cohort born in year k generation (annual birth cohort) they cannot be r = real interest rate. directly compared among living generations and with future generations. There are two possibilities to overcome this problem, namely to measure, for all The term on the left-hand side of the equation is the living generations, full lifetime net tax payments by discounted sum of government spending on goods including retrospective calculations of net tax and services for every future period s, starting in the payments, although this could be quite difficult base year t. The right-hand side describes the three empirically? Second, to compare future net tax ways of financing such spending: government's net wealth in the base year, the present value of future net 3 The methodology is described in detail in A. J. Auerbach, tax payments of all generations alive in the base year J. Gokhale and L. J. Kotlikoff: Generational accounts - a (Nt, t-s, where D denotes their maximum age) and the meaningful
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