Is War Between Generations Inevitable?
Friday, November 30, 2001
by Jagadeesh Gokhale and Laurence J. Kotlikoff
Table of Contents
- Executive Summary
- The Perfect Fiscal Storm
- What Color Is the Ink?
- The CBO's Fiscal Fantasy
- A Spending Reality Check
- Social Security's Long-Term Funding Shortfall
- How Valid Are the Social Security Trustees' Future Projections?
- Medicare's Long-Term Funding Imbalance
- Are Medicare's Trustees To Be Trusted?
- Social Security's and Medicare's Long-Term Finances: A Summary
- Generational Accounting
- Taking a Closer Look at Generational Accounts
- Policies to Achieve Generational Equity
- About the Authors
- Sections of this paper draw heavily on Jagadeesh Gokhale and Laurence J. Kotlikoff, "Social Security's Treatment of Postwar Americans - How Bad Can It Get?" in Martin Feldstein, ed., The Distributional Effects of Social Security Reform (Chicago: University of Chicago Press, 2001).
- According to the JCT projections, the percentage loss in federal income tax revenues from the 2001 tax cut peaks in 2010. We use this 2010 percentage loss in forecasting federal income tax revenues beyond 2010.
- Last year's CBO baseline made an even more extreme assumption, namely that discretionary spending would stay fixed/frozen in nominal terms. Even the CBO acknowledges that its use of the baseline freeze was unreasonable. In its January 2001 budget forecast it states, "Last year, CBO presented two other benchmarks for discretionary spending - a freeze level and the statutory limits on discretionary spending. Lawmakers sometimes use a freeze in appropriations - or the current year's amounts without adjustment for inflation - to gauge the impact of proposed levels of discretionary spending for the upcoming fiscal year. However, recent trends in appropriations probably make it unreasonable to assume a freeze in the baseline over the next 10 years. Throughout most of the 1990s, CBO's baseline for discretionary spending assumed adherence to the statutory limits that were originally enacted in 1990 (and extended in 1993 and 1997). However, the discretionary spending limits expire after 2002, and it is clear from appropriations enacted in recent years that they are no longer a useful measure of current policy or a viable guideline for projecting discretionary spending in the future. (For example, the adjusted limit on discretionary outlays for 2002 - $576 billion - is about $71 billion below CBO's estimate of discretionary outlays for 2001.)"
- 2001 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
- David M. Cutler and Louise Sheiner, "Generational Aspects of Medicare," Federal Reserve Board, Finance and Economics Discussion Series, 2000-9 (January 2000). Available online at http://www.federalreserve.gov/pubs/feds/2000/200009/200009pap.pdf
- A total of 18.4 percentage points of this 25.4 percent rate would be applied only to OASDI-covered earnings; the remaining 7 percentage points would be applied to all earnings.
- This is the zero-sum nature of the government's intertemporal budget constraint, the basic building block of modern dynamic analyses of fiscal policy.
- This discussion of generational accounting draws heavily on Niall Fergeson and Laurence J. Kotlikoff, "The Degeneration of the Euro," Foreign Affairs, March 2000.
- The remaining lifetime budget constraints of current workers would also be unaffected by the language change, since the "old age tax" has the same present value as the current "payroll tax." The fact that the worker might not survive to pay the "old age tax" is immaterial, since his estate could be described with the alternative set of words as being assessed the tax. One might object that the worker could arrange for his estate tax to be smaller than the amount of tax due. But this objection is overcome by describing the worker as being forced to a) buy a life insurance policy that pays an amount equal to the old age tax in the year the "benefit" is paid, b) buy an annuity that pays an amount equal to the old age tax in the year the "benefit" is paid, and c) make the government the owner of both policies. The premiums for these two policies would exactly exhaust the amount of the worker's contributions. Hence, the same government coercion that forces the worker to make current "tax" contributions could force the worker to purchase "private insurance contracts." The company receiving these premium payments can be viewed as lending them to the government (i.e., investing its reserves in government bonds). The government's repayment of the principal plus interest on the bonds would then be used by the insurance company either to pay off the annuity policy if the worker lives to the date he'd collect "benefits," or to pay off the life insurance policy if the worker dies before that date. The fact that such institutional arrangements differ from what we think are our current institutions is simply a matter of labeling.
- Some economists have referred to the need to add implicit government liabilities to explicit ones in calculating the government's true debt. The difference D-B is precisely the sum of explicit plus implicit liabilities, since it adds together the government's official debt and its commitments to transfers to the currently living public, net of the taxes they are projected to pay.
- Jagadeesh Gokhale and Laurence J. Kotlikoff, "Who Gets Paid to Save?" National Center for Policy Analysis, forthcoming study.