Auerbach, A. J., Gokhale, J. and L. J. Kotlikoff, 1991. Generational Accounting: A Meaningful Alternative to Deficit Accounting, NBER Chapters in Tax Policy and the Economy, Volume 5, pages 55–110 National Bureau of Economic Research, Inc.
CBO (2010c), “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011,” Congressional Budget Office, March 2010.
Gokhale, J. B. R. Page and J. Sturrock (1999), “Generational Accounts for the United States: An Update,” in Generational Accounting Around the World, A. J. Auerbahc, L. J. Kotlikoff and W. Leibfritz (eds).
Gokhale, J. and K. Smetters (2003). “Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities,” AEI Press, Washington, D.C.
We are extremely grateful to Lawrence Kotlikoff who acted as a consultant providing unique inspiration, guidance and supervision. Philip Oreopoulos provided key Matlab codes and advice during the project. We thank Gretchen Downher, and Robert Lee for providing key data and profiles. We are thankful to Daniel Feenberg at NBER for providing us the software TAXSIM and for providing assistance with its use. We are indebted to Joyce Manchester (CBO) and Stephen Goss (SSA) for useful conversations. Feedback from a seminar held at the International Monetary Fund on April 2nd, 2010 is gratefully acknowledged. The basic results presented here (but using a shorter data sample) were published in the Selected Issues Paper for the 2010 United States Article IV Consultation (Chapter 6). All errors and omissions are our own.
For these reasons the SSA Trustee Report has recently begun to derive and publish an infinite horizon measure of the SSA Trust Fund adequacy.
Technically, the ratio of the fiscal gap to the present discounted value of GDP shows how much of the gap adjustment can be apportioned to each year from now to infinity to ensure intertemporal solvency
However, from a theoretical perspective, the measured deficit need bear no relationship to the underlying intergenerational stance of fiscal policy.
Thus both scenarios account for all the CBO’s March 20, 2010 estimates of the budgetary impact of the H.R. 4872, Reconciliation Act of 2010 (Final Health Care Legislation) combined with H.R. 3590, as passed by the U.S. Senate (CBO, 2010d), as revised in CBO (2010a).
See the appendix for further details on how the projections of the 2010 August Budget and Economic Outlook are included in our scenarios.
The assumptions of the budgetary impact of the full extension of the 2001 and 2003 tax cuts are borrowed from CBO (2010e). We do not include in the baseline scenario the budgetary impact of the 2 percentage points cut in the employee payroll tax, since there are no official estimates of it. However, because of its temporary nature (one year from implementation), this measure has only a very marginal impact on our results.
Excess growth is defined as the difference between the growth rate of healthcare spending per beneficiary and the per capita growth rate of output.
In order to account for the healthcare reform, we use the CBO’s (2010d) assessment for the period from 2010 to 2019; from 2020 on, the impact is assumed to remain constant at 2019 levels in percent of GDP terms. The subsidies for health insurance exchange are allocated using the same profiles of Medicare (described in the section below). Premium credits are treated as a reduction in individual income taxes. Small employer tax credit and penalty payments by employers and uninsured individuals are applied to corporate income taxes.
To assess the impact of the crisis, individual and capital income taxes are set at the pre-crisis GDP ratio level for 2009–11. Unemployment compensation and food stamps are set at the pre-crisis GDP ratio for 2009–14. Discretionary spending is reduced in order to exclude fiscal stimulus and above-the line financial sector support above the line. Relatedly, IMF Staff Position Note SPN 2009/13 calculates that the PV of the impact of the financial crisis in only 7½ percent of the PV of age-related fiscal costs. Finally, real GDP is assumed to continue growing at its pre-crisis trend of approximately 3 percent per year in the 2010–2015 period to then gradually converge to a long term growth as projected in CBO (2010).
Population aging is also an important driver but far less than the increase in healthcare costs; the increase in healthcare costs is in turn due to various factors, the more important of which is technological change. This factor is summarized in CBO’s “excess growth component” of health-care costs growth (see CBO, 2010).
In the recently enacted healthcare reform, IPAB has a mandate to recommend proposals to limit Medicare spending by a specified amount if the projected five-year average growth rate in Medicare per beneficiary spending is projected to exceed a target according to the targets set by CMS Office of the Actuary. The commission is planned to start working in 2014; the targets are set such as they make the growth of the per- beneficiary Medicare spending to converge to the growth of per capita GDP plus one. As the long-term targets are higher than per-capita GDP growth, the impact of IPAB-driven limit of spending is much smaller than the full removal of excess growth.
Real GDP projections included in CBO (2010) includes a partial catch-up of real GDP to levels in line to the pre-crisis trend. Compared to a path GDP projected in the no-crisis scenario (see footnote 10for details), the GDP projections reach a peak negative difference of 9.4 percent in 2011 to then gradually converge to a long run gap of 4.1 percent. As a consequence, the difference between the PDV of GDP in the baseline and in the no-crisis scenario is only 4.2 percent
We treat the introduction of the IPAB and its potential budgetary impact as separate from provisions under the Final Healthcare Legislation. This approach follows CBO (2010) by interpreting that the introduction of the IPAB with the mandate provided under current law (involving the control of the growth of spending for Medicare) might be difficult to remain law for a long period, and thus should be treated as an “optimistic” assumption.