The Concep of Generaional Accouns (GA) in Comparison wih Naional Transfer Accouns (NTA) The GA is defined as he presen value of ne ax paymen (=ax paid minus benefi received from he governmen) for he remaining lifeime. The accoun evaluaed a he year for he cohor born a he year k is expressed as equaion (1). k (1) + N = D ( s ), k Ts, k Ps, k ( 1 + r) max(, k ) where T s,k sands for he projeced average ne ax paymens o he governmen made in year s by he generaion born in year k. The erm P s,k sands for he number of surviving members of he cohor in year s who were born in year k. For he generaions who are born in year k, where k>, he summaion begins in year k. A se of generaional accouns is simply a se of values of N,k, one for each exising and fuure generaion. When we repor he GA, we usually show he per capia value raher han he aggregae ne ax paymen value for each generaion. The generaional accouning (GA) is a framework o evaluae he susainabiliy of he curren fiscal policies and he inergeneraional redisribuion by fiscal policies, which causes differing effecs on he consumpion, and he savings across generaions. The heoreical background for he GA is he lifecycle income hypohesis: he consumpion and saving are dependen upon oal resource available for he remaining lifeime, no on he curren cash flow (i.e. he iming of income realizaion). The GA akes a forwardlooking approach, which implies ha he GA does no ake ino accoun he axes and governmen ransfers of he pas, because hey do no affec he curren decision making in lifecycle economy (see Equaion (1)). Their effec is refleced in he curren asseholdings which is already included in he resource for he remaining lifeime. The difference beween he NTA and he GA are summarized as follows. Firs, he coverage is differen. The NTA covers he privae secor as well as he public secor, while he GA covers only he public secor. Second, he GA s are sock values, reflecing he fac ha in a lifecycle economy he economic behaviors are deermined by he resource available for he remaining lifeime, no by he iming of he realizaion of income. On he oher hand, a curren sage, mos of he NTA papers repor he flow values, even hough he NTA concep can be exended o he sock concep, once he NTA s are esimaed for he pas years and are projeced o he fuure years. One example of his exension is Bommier e al. (2004). They compue he presen value of ne ransfer from he governmen, defined as he ransfer minus axed paid for he lifeime of he cohors born beween 1850 and 2090. Their calculaion is almos he same as he GA. A difference beween Bommier e al. (2004) and he sandard GA is ha he GA akes a forward-looking approach, which implies ha for non-0-age cohors a he benchmark year, GA do no ake ino accoun he axes and ransfers before he age, while Bommier e al. (2004) compue he presen value for all he cohors for he whole lifeime.
Third, he NTA and he GA use differen erminology for he axes (including social insurance conribuions) and governmen expendiure. The axes and governmen expendiure in GA correspond o he public ransfer inflows and public ransfer ouflows in NTA, respecively (see he workshee Srucure of flow of he PublicRepor NIPA.xls 1 aached). Fourh, he reamen of he governmen expendiure is differen. The workshee Srucure of flow shows ha he NTA does no disinguish beween he governmen ransfer and governmen consumpion: i.e. boh of hem are equally reaed as public ransfer inflows. The GA disinguishes he governmen ransfers from he governmen consumpion 2 as follows: The governmen ransfers include he direc ransfers in he form of cash or in-kind ransfers, he incidence of he benefis of which is relaively clear. The governmen consumpion includes he governmen expendiures o provide he public goods such as he general public service, he naional defense, public order and safey, healh service, educaional service, welfare services, economic developmen, ransporaion and communicaion and ohers, he incidence of he benefi of which is no clear. Someimes he division of public consumpion and public ransfers is no clear. A ypical example is he educaional expendiure. Many GA researchers repor wo separae GA s: (1) one assuming he educaional expendiure as a public ransfer; and (2) one assuming as public consumpion. There can be also some complicaions of classificaion in he case of healh service and welfare services. The difference in he reamen of he governmen consumpion resuls in he difference in he incidence of he benefis of governmen expendiure. In he NTA, he benefis of he governmen consumpion as well as he governmen ransfers are allocaed across age groups in per capia value. In he GA, he benefis of he governmen consumpion are no couned in he ransfer from he governmen (i.e. in he inflow from he governmen), because he incidence of he benefis of he governmen consumpion is no clear. Therefore, he GA s across cohors can be regarded as he fiscal burden, which is he ne ax paymen across cohors, needed o finance he governmen consumpion. 1 This excel file is prepared by Andrew Mason and An-Chi Tung. This file can be downloaded from he NTA websie. 2 The governmen consumpion here includes he governmen invesmen as well as he governmen consumpion: i.e. he governmen consumpion includes all he governmen primary expendiure excluding he governmen ransfers, which is given direcly given o he individuals and he household. GA researchers are no confiden abou he classificaion beween governmen consumpion and governmen invesmen. The governmen invesmen provides benefis o he fuure generaions. Bu, he disribuion of is incidence, across generaions, is no clear. Therefore, in he sandard presenaion, GA reas he governmen invesmen as a par of governmen consumpion. For he purpose of he evaluaion of he fiscal susainabiliy, his way does no cause any problem. However, when we are ineresed in he incidence of he benefis from he governmen invesmen, we need o impue he consumpion flow from he governmen capial. However, he incidence of he impued ren of he governmen capial is sill an open quesion.
Fifh, he classificaion of he axes is differen: he NTA follows he classificaion of he NIPA, while he GA classifies he axes according o he ax bases. Recenly, Andrew Mason and An-Chi Tung reclassified he axes according o he ax bases. The workshee Ouflow Reclassificaion of he file PublicRepor NIPA.xls illusraes a able named Reclassificaion of Public Ouflow Source (SNA classificaion) : he classificaion of is rows follows ha of he NTA, while ha of is columns is based on he ax bases, which is basically he same as he GA. There are some difference in he classificaion of he columns in he able and ha in GA. The social insurance conribuions can be reaed separaely in GA, however, hey can also be regarded as labor income axes if i is raised enirely from he payroll. The classificaion of he columns reas he axes from he res of he world as a separae iem. In GA, hey are reaed as axes on consumpion and oher ax bases. In many cases he axes from he res of he world consis mainly of ariff and impor axes, herefore, he axes are regarded as consumpion axes. The Table does no include he seigniorage, which is he governmen revenue hrough prining money. In mos of he developed counries, is magniude is very small, bu, in some less developed counries, i could be an imporan source of he governmen revenue. In summary, he GA is he se of he presen values of he ne ouflow o he governmen, i.e. he ouflow o he governmen minus he inflow from he governmen, across cohors for heir remaining lifeime, o finance he governmen consumpion of he presen and fuure. And, he classificaion of axes in GA is based on he ax bases (inflow from he governmen), because his classificaion faciliaes he esimaion of heir incidence.
Procedure of GA calculaion The compuaion of he GA s sars wih he following ineremporal budge of he governmen. (2) D 0 N ( s ), s + N, + s = Gs ( 1+ r) W g The firs summaion on he lef-hand side of (2) adds ogeher he GA s of exising generaions. The erm N,-s sands for he accoun of he generaion born in year -s, defined in Equaion (1). The index s in his summaion runs from age 0 o age D, he maximum lengh of life. The second summaion on he lef-hand side of (2) adds ogeher he presen value of remaining ne paymens of fuure generaions, wih s represening he number of years afer year ha each fuure generaion is born. The firs erm on he righ-hand side of (2) is he presen value of governmen consumpion. In his summaion he values of governmen consumpion, G s in year s, are discouned by he pre-ax real ineres rae, r. The remaining erm on he righ-hand side, W g, denoes he governmen s ne wealh in year is asses minus is explici deb. The budge consrains requires ha he fuure ne ax paymens of curren and fuure generaions be sufficien, in presen value, o cover he presen value of fuure governmen consumpion as well as service he governmen s iniial ne deb. Equaion (2) indicaes he zero sum naure of inergeneraional fiscal policy. Holding he presen value of governmen consumpion fixed, a reducion in he presen value of ne axes exraced from curren generaions (a decline in he firs summaion on he lef side of (2)) necessiaes an increase in he presen value of ne ax paymen of fuure generaions. Excep for equaion (2), here is no resricion for GA calculaion, herefore, here can be a lo of ways o repor GA. The GA for he exising generaions and fuure generaion can be expressed in differen ways, depending on he iming of fiscal reforms o resore longerm budgeary balance and he mehods employed (e.g. raising axes or reducing benefis). The sandard way of reporing he GA is employed o evaluae he fiscal susainabiliy. The sandard way akes wo seps. The firs sep involves calculaion of he ne ax paymens of curren generaions (he firs erm on he lef-hand-side of equaion (2)). This is done on he basis of curren fiscal rules wihou being consrained by he ineremporal budge consrain of he governmen. In he second sep, given he righ-hand-side of equaion (2) and he firs erm on he lef-hand-side of equaion (2), we deermine, as a residual, he value of he second erm on he lef-hand side of equaion (2), which is he collecive paymen, measured as a ime- presen value, required of fuure generaions. Accordingly, whereas he fiscal burdens for curren generaions are based enirely on curren fiscal rules, he governmen budge consrain fully deermines he fiscal burdens for fuure generaions.
Based on he collecive amoun required of fuure generaions, we deermine he average presen value of lifeime ne ax paymens for each member of each fuure generaion under he assumpion ha he average lifeime ax paymens of successive generaions rise a he economy s rae of produciviy growh. Leaving ou his growh adjusmen, he lifeime ne ax paymens of fuure generaions are direcly comparable wih hose of curren newborns, since he generaional accouns of boh newborns and fuure generaions ake ino accoun ne ax paymens over hese generaions enire lifeimes. Measuring he generaional imbalance as he difference beween wo lifeime ax burdens provides a measure for he susainabiliy of he public finances. If fuure generaions bear a heavier ax burden han he newly born do, curren fiscal rules will have o be adjused in he fuure o mee he budge consrain. In addiion o his sandard way, we can presen GA s in many differen ways, depending on he research opic. Insead of reaing he fuure generaions as one generaion, we can divide he fuure generaions ino differen cohors, indexed as he year of birh, and repor differen accouns across cohors (e.g. Auerbach e al. (2005), Kolikoff e al. (1996), Chun (2007)). Insead of assuming ha he accouns for he exising generaions are deermined by he curren fiscal policy rules, hey can be compued reflecing he effecs of he fuure fiscal policy revisions on he curren generaions (e.g. Auerbach e al. (2005), Chun (2007)). The sandard procedure can be summarized as follow 3. 1. Populaion projecion --- projec he populaion by age*sex overime 2. Esimaion of age profiles --- Taxes: Taxes are usually classified as wage income ax, capial income ax, consumpion ax, Seigniorage (inflaion ax), propery ax, social insurance conribuion. The counerpar of social insurance conribuion in he NTA is he ouflow of social insurance programs, e.g. public healh (ouflow), public pension (ouflow). For he classificaion of axes in he NTA, refer o he NTA websie. --- Transfers: Governmen ransfers in he GA include he ransfer from governmen in he form of in-kind or cash, such as he benefis of public pension, public healh insurance, unemploymen insurance, public aid o low-income household, he disabled (e.g. OASDI, HI, AFDC (TANF), SSI, Food Samps in he US). The counerpars in he NTA are public pension inflow, public healh care inflow, public ransfer oher in-kind inflow, public ransfer oher cash inflow, ec. 3. Projecion of aggregae value of axes, ransfers, and governmen consumpion overime. 3 The compuaion procedure of GA is explained in he Manual of GA Excel file and he GA Excel file illusraes he compuaion procedure wih he example of he Korean case.
For he projecion, he axes, ransfer, and governmen consumpion are classified ino: (1) age-specific; and (2) non-age-specific. The group (2) includes he governmen programs whose expendiure is highly dependen upon demographic srucure, such as pension benefis, public healh care, educaional expendiure and social welfare services o he elderly, women, and children. 4. Allocae he aggregae values of axes and ransfers among age-sex group overime. 5. Compue he presen value of each cohor s (per capia) ne paymen o he governmen for her remaining lifeime (in sandard presenaion of GA). --- Ne paymen o he governmen = axes ransfer from he governmen. --- The PV s of ne paymen of he curren generaions is compued on he basis of curren fiscal rules wihou being consrained by he ineremporal budge consrain of he governmen. --- The PV of ne paymen of he fuure generaions (i.e. he generaions ha are no ye born as of he benchmark year) is compued as a residual from he ineremporal budge consrain. Governmen s ineremporal budge consrain: PV of ne paymen of curren generaion + PV of ne paymen of fuure generaion + ne wealh of governmen = PV of Governmen consumpion of he presen and he fuure period --- Based on he collecive amoun required of fuure generaions, we deermine he average presen value of lifeime ne ax paymens for each member of each fuure generaion under he assumpion ha he average lifeime ax paymen of successive generaions rises a he economy s rae of produciviy growh. 6. Evaluae he fiscal susainabiliy of curren policies (in sandard presenaion of GA) --- Index for fiscal susainabiliy: Generaional Imbalance (GI) GI = (PV of ne paymen of fuure generaion PV of ne paymen of age-0 cohor a he benchmark year) / (PV of ne paymen of age-0 cohor a he benchmark year) GI > 0: he lifeime ne paymen of he fuure generaion (needed o mainain he long-erm budgeary balance) is larger han ha of curren generaion (on he bases of curren fiscal policies rules). This implies ha he curren fiscal policy is no susainable and ha o resore he long-erm budgeary balance ax burden should be raised someime in he fuure. References Auerbach, Alan J., Young Jun Chun, and Ilho Yoo, Fiscal Burden of Korean Reunificaion: A Generaional Accouning Approach," FinanzArchiv, Vol. 61, No. 1, pp.62-97, 2005. earlier version in NBER working paper #10693.
Chun, Young Jun, "Populaion Aging, Fiscal Policies, and Naional Saving: Predicion for Korean Economy", Io, Takaoshi and Andrew Rose eds, Fiscal Policy and Managemen in Eas Asia, NBER Eas Asia Seminar on Economics Volume 16, Universiy of Chicago Press and NBER, 2007, earlier version in NBER working paper #12265. Kolikoff, Laurence, Jagadeesh Gokhale and John Sabelhaus (1996), Undersanding he Poswar Decline in U.S. Saving: A Cohor Analysis, NBER working paper No. 5571.