NCPA - National Center for Policy Analysis

The Federal Fiscal Gap

July 29, 2003

Economist Michael Boskin of the Hoover Institution caused a stir recently with a study claiming that taxes that will be due in coming years on tax-deferred pension assets (401(k)s and Individual Retirement Accounts) will be enough to cover most of the projected federal fiscal shortfall over the next few decades.

However, Boskin has announced that a programming error led to incorrect estimates of future federal obligations.

Meanwhile, Brookings Institution economists recently noted that 85 percent of the taxes that will hit retirees have been taken into account in revenue projections. According to their estimates of the federal fiscal shortfall:

  • Between now and 2040 the fiscal gap will amount to 2.25 percent of Gross Domestic Product (GDP) or $6.7 trillion.
  • The permanent fiscal gap under current policies will be 7.55 percent of long-term GDP, or $59.7 trillion.
  • Using Boskin's assumptions regarding feedback effects would, they found, reduce the gap by only about 0.2 percent of GDP -- not enough to matter.

Their results imply that some combination of immediate and permanent tax increases and/or spending cuts that amount to more than $750 billion per year and rise with the size of the economy over time is necessary to achieve long-term fiscal balance.

Source: Alan J. Auerbach, William G. Gale and Peter R. Orszag, "Reassessing the Fiscal Gap: Why Tax-Deferred Saving Will Not Solve the Problem," July 14, 2003, Brookings Institution.

For Boskin study


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