The Need for Balance between Generations

May 14, 2013

While politicians are talking about balance between cuts and revenues, or between total spending and taxes, few are talking about the need for a balance between generations. That's partially because our government does not even report the full impact that today's fiscal policies will have on future generations, say Laurence Kotlikoff, a senior fellow with the National Center for Policy Analysis and an economist at Boston University, and Nick Troiano, cofounder and national field director of The Can Kicks Back, a Millennial-driven campaign to fix the national debt.

Fortunately, economists developed two innovative analyses -- the fiscal gap and generational accounting -- two decades ago to describe the true size of our fiscal imbalance and the repercussions it will have on future generations.

The way we currently measure our country's indebtedness does not capture the amount of money government has borrowed from itself and the vastly larger amount of money government has promised in future spending through programs such as Social Security and Medicare. Nor does it take into consideration the government's ability to raise taxes or reduce spending to cover these obligations. The fiscal gap does both.

  • It is the present value difference between future projected spending (including servicing the official debt) and future taxes over an infinite time horizon.
  • In 2012, the United States' fiscal gap grew by $11 trillion to a mindboggling $222 trillion -- the largest of any country in the world relative to the economy.
  • This analysis can be used to judge policies based on their ability to close our fiscal imbalance over the long term, not just reduce deficits over the next 10 years as is currently the practice.

Generational accounting measures the consequences that our growing fiscal imbalance will have on future generations. It calculates the difference between total lifetime taxes paid and government transfers collected by age cohort, assuming the fiscal gap is left only to future generations to close.

According to the latest generational accounting published by the International Monetary Fund in 2011, taxes on future generations would have to increase by 21.5 points to close the fiscal gap. This analysis can be used to determine how policies distribute their costs and benefits across age groups, just as we now see how they are distributed across income levels.

Putting our fiscal house in order in a generationally balanced way should be an imperative for both parties. We cannot continue to ignore the economic and moral injustice being wrought on future generations because of our inability or unwillingness to face the facts.

Source: Laurence Kotlikoff and Nick Troiano, "Fixing a Deficit of Facts," Roll Call, May 10, 2013.

 

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