ESTIMATING THE FISCAL GAP USING GENERATIONAL ACCOUNTING
January 29, 2010
Generational accounting is a well-established methodology to measure the burden of government, says Laurence J. Kotlikoff, a professor of economics at Boston University and a senior fellow with the National Center for Policy Analysis. For example, a generational account for any given generation measures the generation's remaining lifetime net tax bill as a present value -- what the generation will pay net of what it will receive, all valued as of today.
If the generational accounts of all current and future generations are added together, assuming no change in fiscal policy, the sum amounts to what all current and future citizens are going to pay, on net, in taxes to the government (measured as a present value). This amount has to cover the government's official debt plus the present value of all future government purchases of goods and services (discretionary spending), explains Kotlikoff:
- The fiscal gap is the difference between the government's official debt plus discretionary spending and the amount of taxes current and future citizens will pay.
- It incorporates all of the government's fiscal activities - including its financial obligations under Medicare, Medicaid, Social Security, welfare, unemployment, and interest and principal on government debt.
Taking into consideration all of the government's financial liabilities and projected future tax receipts, the current fiscal gap in the United States is estimated by Jagadeesh Gokhale of the Cato Institute and Kent Smetters of the University of Pennsylvania at $77 trillion -- more than five times the United States' present gross domestic product (GDP). In order to close a gap of this size, the Federal Insurance Contribution Act (FICA) payroll tax -- currently 15.3 percent -- would need to be more than doubled immediately and permanently.
To understand how this figure can be so large, consider:
- There are now roughly 33 million adults in the United States receiving retirement benefits.
- When the 78 million baby boomers retire, there will be more than twice the number of retirees receiving benefits than there are currently.
- While there will be a significant increase in those dependent on government programs like Social Security and Medicare when the boomers retire, there will only be about 2.7 workers per retiree to help pay the benefits -- down from 3.28 workers per retiree in 1985 and 3.43 in 2000.
Source: Laurence J. Kotlikoff, "Is Uncle Sam Bankrupt?"National Center for Policy Analysis, Brief Analysis No. 689, January 29, 2010.
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