Singapore’s economic growth has been heavily dependent on factor accumulation during the past three decades. Attempts to gauge productivity growth in Singapore and other East Asian countries has led to the widely publicized debate on whether the East Asian “miracle” was driven by factor accumulation or productivity growth. According to the most recent study by the authorities, Singapore’s productivity growth was indeed very low until the 1980s, but has improved significantly to a level comparable to the Organization for Economic Co-operation and Development (OECD) average in the 1990s.


Singapore’s economic growth has been heavily dependent on factor accumulation during the past three decades. Attempts to gauge productivity growth in Singapore and other East Asian countries has led to the widely publicized debate on whether the East Asian “miracle” was driven by factor accumulation or productivity growth. According to the most recent study by the authorities, Singapore’s productivity growth was indeed very low until the 1980s, but has improved significantly to a level comparable to the Organization for Economic Co-operation and Development (OECD) average in the 1990s.

V. Generational Accounts for Singapore: Is Singapore Ready for the Demographic Transition?1

A. Introduction

1. Prudent fiscal policies have been the cornerstone of Singapore’s financial management, with the government budget recording an overall surplus in every year but two since 1970. Between 1970 and 1990, the overall surplus averaged around 4 percent of GDP. In the 1990s, prior to the Asian crisis, overall surpluses grew especially large. Between 1990/91 and 1997/98, the overall surplus averaged HVz percent of GDP. These surpluses (together with balances in the CPF—discussed in Chapter IV) have been used to accumulate assets, mostly through overseas portfolio investment. By March 2000, it is estimated that gross government assets were the equivalent of over 200 percent of GDP, while net assets (gross assets less explicit liabilities) were estimated to be equal to about 125 percent of GDP.

2. The accumulation of sizable estimated net government assets has generated interest in Singapore’s medium- and Long-Term fiscal policy stance. A 1997 IMF study of the Long-Term fiscal policy stance suggests that, even taking into account the impact of population aging on revenues and expenditure, under present policies the government would continue to accumulate assets at a rapid rate. The study concluded that “While economics were not the only consideration, from a welfare perspective, there appeared to be a strong case for a larger reduction in the fiscal surplus over time than presently planned….”

3. This paper uses the generational accounting framework with a view to assessing the sustainability of fiscal policy and measuring the fiscal burdens facing current and future generations as a result of current fiscal policies (Auerbach, Kotlikoff and Leibfritz, 1999). The growing interest in generational accounting amongst policy makers has been stimulated by the rapid aging of the population that is taking place in their countries (Kotlikoff, 1993). In most cases, the conduct of past fiscal policies implies the prospect of funding large fiscal bills in the future. The key question in these cases is how large a fiscal burden current fiscal policy leaves to future generations and what additional measures are necessary to ensure that future bills can be paid. In the case of Singapore, the accumulated net asset position suggests a different question, namely, whether Singapore is prepared for the fiscal pressures likely to arise from the demographic transition (see Chapter IV). The methodology outlined in this paper could provide an organized framework in which to simulate the impact of aging and other structural changes on revenues and expenditures on the public finances and thereby, examine the present versus future orientation of fiscal policy.

4. It should be emphasized, at the outset, that the discussion in the paper is based on illustrative scenarios showing the long-Term implications of current fiscal policy using the generational accounting framework, where the emphasis is on the impact of demographic changes. The main objective of the methodology is not to make specific recommendations about fiscal policy changes, but to highlight the implications of current policies in the face of the likely effects of the demographic changes. Any policy implications of these results can only be drawn in the context of a broader analysis, which takes account of the authorities’ objective function and a more extensive examination of underlying economic and structural assumptions. The results of the exercise in this paper should therefore be seen as illustrative and not as specific policy recommendations.

5. The rest of the paper is organized as follows. Section B briefly outlines the concepts behind generational accounting and Section C describes the indicators used to assess long-term fiscal imbalances2. Section D discusses the data and the mechanics of estimating generational accounts for Singapore, Section E presents the key findings and Section F concludes.

B. What Are Generational Accounts?

6. In simplest terms, generational accounting is based on the government’s intertemporal budget constraint, which requires that either current or future generations pay the government’s bills—defined as the present value of the government’s projected future purchases of goods and services taking into account what is needed to service its official net financial liabilities or what is earned on the stock of net assets. Subtracting from these bills the present value of projected future net tax payments of current generations gives the present value of the net tax burden facing future generations as a result of current fiscal policies. By comparing the growth-adjusted lifetime net tax burden facing members of future generations with that facing current newborns (who are assumed to pay only the net taxes implied by current policies), it is possible to assess the generational imbalance and the sustainability of current fiscal policies.3

7. Generational accounts are thus defined as the present value of net taxes (taxes paid minus transfer payments received) that individuals of different age cohorts can expect, under current policies, to pay over their remaining lifetimes. Adding up the generational accounts of all current living generations gives the collective contribution of those generations toward paying the government’s bills. According to the government’s intertemporal budget constraint those bills left unpaid by current generations must be paid by future generations. This intertemporal budget constraint can be expressed in a simple equation as shown in Table V.1, where A is the sum of the generational accounts of those currently living, B is the sum of the generational accounts of future generations, discounted to the present, C is the government’s net debt or net wealth, and D is the sum of future government purchases, discounted to the present (see Table V.1). For a size of the government’s bills, C+D, the smaller is A, the net payments by those currently living, the larger is B, the net payments of those yet to be born4.

Table V.1.

The Intertemporal Budget Constraint

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8. As noted above, a key aim of generational accounting is to assess the sustainability and generational equity of fiscal policies. If the intertemporal budget constraint above holds as an equality, current fiscal policies are sustainable in the long term. In cases where countries have net debt, the sustainability condition amounts to imposing the familiar condition that current public debt cannot continually be serviced through the accumulation of further debt.5 A symmetrical application of this condition in the case of net wealth is that the interest income from government wealth should be consumed rather than continually accumulated. While it is intuitive to see how a situation that gives rise to ever increasing debt is not sustainable, it is much less intuitive when the situation is reversed as in the case of Singapore where there is a sizable initial stock of public wealth. The concept of “sustainability” in this latter context is better understood in terms of optimality—i.e., whether it is optimal for a country to postpone consumption and accumulate an increasing stock of assets continuously into the future, or in terms of efficiency—i.e., to what extent it is efficient to accumulate public assets through taxation.

9. As for inter generational equity, if future generations face a higher lifetime net tax burden than do current newborns, current policy is not generationally balanced. The same is true if future generations face a smaller Long-Term lifetime net tax burden than do current newborns.

10. The generational accounting framework provides a systematic framework for long-term fiscal policy formulation, but the approach also has several shortcomings (Haveman, 1994).

  • First, it is a partial equilibrium accounting framework which does not take into account the behavioral changes induced by the implied changes in policies, and therefore their impact on GDP. For example, there are no consumption or labor supply responses to changes in taxes or transfers.

  • Second, the framework does not allow for Ricardian economic agents who are altruistically linked to their descendants and use bequests to offset redistribution between generations caused by government policies. It is consistent with the neoclassical Long-Term model, which does not take into account either liquidity constraints or precautionary savings.

  • Third, it does not take into account changes in the structure of the economy that are likely to occur in the Long-Term horizon within which the framework is set.

  • Fourth, the construction of generational accounts requires that taxes and expenditures be allocated to individuals of different ages. The construction of the tax and expenditure profiles is fraught with difficulties, requiring the use of assumptions, which in turn can affect the results of the analysis.

C. Indicators of Long-Term Fiscal Imbalance

11. How are Long-Term generational imbalances arising from fiscal policy evaluated within this framework? One indicator is calculated assuming that only future generations bear the whole burden of the adjustment arising from current fiscal policies. First, the net lifetime taxes of current living generations and the newborn is calculated, then the present value of government purchases is calculated, and finally, the accounts of all future generations are derived residually, as the amount of net taxes or net transfers that would satisfy the intertemporal budget constraint shown in Table V.1. Based on this amount, the average lifetime net tax payment of each future generation is estimated under the assumption that every future generation pays the same share of its lifetime labor income in net taxes, i.e., that each future generation faces the same lifetime net tax rate. By comparing the accounts (in terms of taxes due or transfers receivable) of the current generation (the term A in Table V.1) and the growth adjusted accounts of a future generation (the term B in Table V.1) one can therefore evaluate the imbalance implicit in current fiscal policies.

12. A second indicator of generational imbalances can be obtained assuming that future generations also face current fiscal policies (this amounts to applying to future generations the same relative age and gender profiles for taxes and transfers that apply to current individuals), calculating the difference in the generational accounts—the Long-Term intertemporal budget gap—and then obtaining a measure of the policy changes that may be needed to eliminate this gap. This method allows the estimation of immediate and permanent changes in specific taxes or transfer payments that would be necessary (for all generations) to close the intertemporal budget gap.

D. The Mechanics of Generational Accounting

13. Generational accounting extrapolates current fiscal policies into the future by projecting all taxes and transfers using the age and gender profiles and demographic projections.6 The first step in constructing generational accounts for Singapore is to identify the set of aggregate taxes and transfers to be allocated among individuals of different age and gender. This exercise starts from the 1999 budget data on Singapore government revenues and on the functional classification of government expenditure (Table V.2).

Table V.2.

Government Revenues and Expenditures, 1999

(In millions of Singapore dollars)

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Operating revenues - Operating expenditure - Other current expenditure - Development expenditure.

Total revenues - Total expenditure.

14. Several points are to be noted with respect to the data for Singapore.

  • First, investment income and debt servicing are not included among taxes and transfers as they are already taken into account through their impact on the stock of net government financial assets.

  • Second, because net lending reflects loans to statutory boards that are repaid (with the exception of the subsidy to the Housing Development Board), they are not included in expenditure.

  • Third, the treatment of capital receipts, which in Singapore mainly reflect revenues from leasing government owned land, is a difficult issue. Typically, the value of the government’s physical assets (land, infrastructure, parks, etc.) are not included in measures of government wealth for generational accounting on the grounds that including such assets would have no impact on the estimated fiscal burden facing future generations—the projected flow of government purchases would have to be adjusted by an offsetting flow of imputed rent on these assets. In Singapore, however, capital revenues arise not from land sales but from Long-Term leases of government land. Therefore, in this paper, they are treated as part of revenues.7

15. The second step of generational accounting is to obtain an age and gender distribution of as many of these taxes and transfers as possible. This requires building age and gender profiles from household or individual survey data. Box V.l describes the relative profiles that were built for Singapore. As most of the survey data refers to the age of either the head of the household or the main income earner, the general rule for distributing taxes and transfer payments is to allocate them to the head of the household, with no attempt being made to estimate the redistribution within the family.

16. For other expenditure items included in the government budget—security, social and community services other than health and education, economic services, general services, and other current expenditure—that cannot be distributed among age groups, an artificial profile has been generated that allocates them uniformly among all age groups. The constructed profiles are shown in Figure V.1.

Figure V.1.
Figure V.1.

Singapore: Relative Profiles

Citation: IMF Staff Country Reports 2000, 083; 10.5089/9781451834185.002.A005

Source: Staff calculations.

17. The third step is to obtain an estimate of the government’s net financial debt or wealth. In the case of Singapore, this task is complicated by the lack of complete information on the government’s net asset position. For the purposes of this analysis, government net wealth is estimated from the statement of assets and liabilities published in the 2000 budget, which reports the net financial assets for the fiscal year 1999/00. Two caveats are in order here. First, from the assets (which includes cash, investment and others, for a total of almost S$319 billion) only the liabilities reported in the Government Securities Fund are subtracted. All other funds are not considered as financial liabilities because they do not represent explicit expenditure commitments, but are more in the nature of contingency funds. Second, any potential underestimation of the financial liabilities resulting from this assumption will likely be offset by the fact that the assets are reported at their historical book value rather than at market value. These assumptions produce an estimate of net government financial wealth of around S$181 billion or about 125 percent of GDP.

Relative Age and Gender Profiles of Taxes and Transfers

  • Income taxes: The age and gender profile for income taxes has been obtained using the median monthly income by age groups contained in the General Household Survey (Socio Demographic and Economic Characteristics) 1995, undertaken by the Department of Statistics. This profile is applied to income taxes paid by both the household and the corporate sector. The reason is that in the case of small open economies, like Singapore, corporate income taxes are assumed to be borne by (and are therefore allocated to) labor. This profile is applied also to capital receipts, other tax revenues and other non tax revenues.

  • Taxes on goods and services: This profile has been built using the average monthly expenditure per household by the age group of main income earners, as showed in the Report on the Household Expenditure Survey, 1992/3, published by the Department of Statistics.

  • Taxes on assets: This tax is allocated using the data on the assets owned by age group of main income earners (in addition to a household own residence), contained in the Report on the Household Expenditure Survey, 1992/93.

  • Health expenditure: This expenditure has been distributed using the admission rates of public sector hospitals by age and gender, as published by the Ministry of Health, 1997.

  • Education expenditure: This profile has been built using the number of resident students aged 5 years and over by age and gender, reported in the 1995 General Household Survey, and giving a larger weight on the age groups in the university education (under the assumption that university education is more expensive, on a per capita basis).

18. The final step is the estimation of Long-Term projections of population by age and sex. For the purpose of this study, demographic projections made by the World Bank in 1996 are used. These projections are based on the following assumptions. The total fertility rate rises slowly from the current low level (1.8) toward levels that are closer to the replacement rate (around 2.1 by 2150); life expectancy at birth, which as an average for men and women is 75 in 1999, rises to approximately 80 in 2030 and 86 in 2150; and, finally, annual net migration is assumed to decline linearly to zero from a rate of change of around +5 percent in 1999. Under these assumptions, the old age dependency ratio (the ratio between the number of those aged 65 or more and those aged 18–64) jumps from the current 10 percent to 30 percent in 2025, and reaches around 40 percent in 2050 before settling at around 35 percent thereafter.

E. Sustainability and Intergenerational Equity in Singapore

19. Five scenarios are examined to study the issue of intergenerational equity and sustainability of fiscal policies in Singapore. All scenarios use the population projections outlined above, and all are based on the same assumptions about labor productivity growth—namely, that labor productivity grows at 3½ percent per annum until 2020 and at 2 percent per annum thereafter. All future taxes and transfers are discounted at a rate of 5 percent per annum.8 Theoretically, generational accounts are derived in an infinite horizon framework. In the empirical work discussed here, the horizon converges at 200 years given the range of chosen discount rates. Different assumptions about the treatment of revenues from leasing land, and the structure of taxes and spending are made in the different scenarios, with Scenario 1 corresponding to current fiscal policies (or the status quo), and the impact of the projected demographic trends.

Scenario 1

20. Using the demographic projections, the age and gender profiles of all taxes and transfers, the rate of growth of labor productivity and the discount rate, and data on revenues and expenditures in 1999, generational accounts of currently living generations are calculated (Table V.3).9 (The term A in Table V.I. can be derived by multiplying the per capita net tax/transfer figures shown in the second column in Table V.3 with the population in the corresponding age cohort and then summing over all living cohorts).

Table V.3.

Singapore’s Generational Accounts

(In 1999 Singapore dollars)

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21. Table V.3 shows that those born in 1999 will receive on average from the state during their lifetime a net transfer of around S$20,000 (in 1999 prices). The net transfer received by a newborn female is larger than the net tax paid by a newborn male, a difference mainly due to the smaller amount of taxes paid by women because they have lower labor force participation rates.10 The average currently living cohort between the ages of 5 and 60 is a net payer of taxes over the remainder of their lifetime, with the highest amount of net taxes being paid by the cohort currently aged 20–25 for men, and 25–30 for women. Cohorts older than 60 begin receiving a net transfer from the state targeted to the elderly (such as pensions and health care services).

22. As for intergenerational equity, the two measures of Long-Term fiscal imbalance are shown in Table V.4

  • First, a comparison of the generational accounts for newborn and future generations implies a significant increase in net transfers to future generations. While the generation born in 1999 receives, on average, S$20,000 of net transfers from the state, future generations will receive around S$386,000 at 1999 prices. This result stems from the combination of surpluses and a large stock of government wealth in the base year.11

  • The second measure—the intertemporal budget gap—is negative and equal to about 375 percent of GDP. Such a gap suggests that there is an adequate cushion to meet the needs of an aging population and that there may also be scope for a reduction in taxes, increases in expenditures or some combination of the two.

Table V.4.

Generational Accounts Scenario 1

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23. Table V.5 shows that these results are quite robust to changes in assumptions about the discount rate or in the labor productivity growth rate. The fiscal imbalance becomes smaller for higher values of real productivity growth and/or lower discount rates. This is because the smaller is the difference between the interest rate and the rate of growth of income, the smaller is the present value of the interest income that must be distributed in order to restore sustainability.

Table V.5.

Scenario 1: Sensitivity Analysis

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In 1999 Singapore dollars per capita.

In percent of GDP.

24. The remaining scenarios examine different assumptions about the likely evolution of expenditures and revenues to determine whether the financial cushion will remain in place, despite aging, rising health care costs and possible erosion in the revenue base in an increasingly digital world.

Scenario 2

25. This scenario is based on the same assumptions as Scenario 1 with one important exception. It makes the conservative assumption that revenues from land leases are excluded from the total revenues, for the reasons discussed above. As shown in Table V.6, excluding receipts from land leases reduces the size of the gap but does not reverse the result that future generations will receive larger transfers than current living generations. The intergenerational budget gap is reduced to 150 percent of GDP.

Table V.6.

Imbalance Indicators in Different Fiscal Scenarios

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In 1999 Singapore dollars per capita.

In percent of GDP.

Scenario 3

26. The third scenario attempts to take into account the impact of aging on health and education operating expenditure over and above that implied by an increase in Long-Term dependency ratios. Specifically, operating expenditure on health is assumed to increase sixfold over the next 30 years, from 0.7 percent of GDP in 1999 to 3.6 percent of GDP in 2030, due to population aging, larger expenditure per hospital admission (reflecting the increase in demand for more qualified medical staff and better drugs and equipment), etc.12 Moreover, operating expenditure on education is projected to increase to 4 percent of GDP in 2030, despite the aging of the population which would normally reduce this expenditure, because of an assumed increase in expenditure per student, higher student enrollment rates in each education category (primary secondary and tertiary education) and larger government subsidies. All other receipts and expenditures per beneficiary are assumed to grow in line with labor productivity.

27. Table V.6 shows the two measures of fiscal imbalance under these assumptions. Even incorporating a sizable increase in operating health and education expenditure, future generations will receive net transfers that are some S$273,000 higher than those received by current generations, and the estimated IBG will remain around 225 percent of GDP.

Scenario 4

28. The fourth scenario retains the assumptions made in Scenario 3 about health and education expenditures, but assumes (i) that operating revenues will decline as a percentage of GDP due to the competitive pressure on tax rates coming from globalization and to the decline of the tax base caused by the rise in e-commerce; (ii) that capital receipts will fall as a result of a moderation in land sales and leases; and (iii) that other operating expenditure will remain constant as a share of GDP and total capital expenditure declines marginally as a share of GDP.13 Table V.6 indicates that the finding that fiscal policies are oriented towards the future is not reversed.

Scenario 5

29. The final scenario retains the assumptions made in Scenario 3 about health and education expenditure, but reverts to the conservative assumption of excluding revenues from land leases. This scenario is thus based on the most conservative set of assumptions in this paper. In this case, the simulations suggest that the intergenerational imbalance is largely eliminated. The results suggest that future generations will still receive slightly larger transfers than will current generations, but the IBG measure suggests that generational accounts for current and future generations are broadly in balance.

30. To summarize, the scenarios outlined above suggest that under various assumptions about the future path of revenues and expenditures, Singapore’s fiscal position is well–equipped to handle the financial pressures that are likely to emerge from the aging of the population; rising health care costs; and downward pressure on revenues from globalization. Only in the case where revenues from land leases are disregarded altogether is the tilt of fiscal policies toward future generations eliminated; in other cases, there would be some scope to raise expenditures, lower taxes, or some combination of the two. However, to go from the results discussed here to specific policy recommendations about tax and expenditure policies in the future would require a discussion of the authorities’ objective function and a fuller analysis of the underlying assumptions about the structure of the economy and other forces likely to impact fiscal and economic developments.

31. Two such assumptions are: first, the discount rate can be seen to represent not only the degree of uncertainty about future taxes and expenditures needs but also, more broadly, the degree of risk aversion on the part of the policymakers. In Singapore, the authorities believe that the small size of the country, political uncertainties in neighboring countries, and the lack of natural resources justify the accumulation of a sizable “rainy day” reserve. Taking account of a relatively high degree of risk aversion would imply a higher discount rate which, in turn, would imply a smaller imbalance across generations. The second assumption relates to immigration flows and labor force participation rates (especially by females). There is scope for these to be larger than assumed in this exercise. In this case, the future tax base is likely to be larger than under the baseline, thus tending to heighten the estimated tilt in favor of future generations.

F. Concluding Remarks

32. Generational accounting suggests that current budgetary policies in Singapore involve a significant redistribution between generations. Contrary to the majority of industrialized countries, however, for Singapore the redistribution is tilted toward future generations. The large stock of net wealth that has been accumulated through past fiscal surpluses is the channel through which this redistribution takes place. This stock of net wealth provides an adequate cushion to absorb not only the impact of aging but also rising health care costs, and downward pressure on tax revenues. Only in the conservative case where revenues from land leases are disregarded altogether is the generational imbalance eliminated.

33. One point that deserves emphasis in this context is that the tilt toward future generations of fiscal policy is mitigated by the intergenerational redistribution that occurs within the family in Singapore, spontaneously, and through both encouragement (via tax relief for financial support provided to aged parents) and enforcement (via the Parent Maintenance Act, which makes it illegal for a son not to take care of his aged parents). The extent of this redistribution is indicated by survey data which show that the most important source of income for Singaporean elderly is support from their children (Low and Aw, 1996). In this manner, the household sector partially offsets the redistribution across generations that occurs via public finances.

34. In conclusion, it bears repeating that generational accounting provides a different perspective on fiscal policy analysis than traditional measures and methodologies. Specifically, it raises the possibility that redistribution between generations is greater than traditional fiscal analysis might suggest. A discussion of any consequent need to adjust fiscal policy would hinge on an assessment by policy makers and the public of the extent to which such a redistribution is desirable.

APPENDIX A Technical Exposition of Generational Accounting

The Government’s Intertemporal Budget Constraint

The intertemporal budget constraint (with all variables expressed in real terms) can be expressed as follows:

  • The term Nt,k Stands for the present value of the average remaining lifetime net tax payment - the generational account measured on a per person basis—at time t of the generation born in year k. The present value is formed as of year t for generations alive at time t and as of the year of birth for generations not yet born. For example, Nt,t is the time-t present value of lifetime net tax payments of those born at time t, i.e., it is the generational account of time-t newborns;Nt,t-65 is the present value of the average remaining lifetime net tax payments—the generational account—of those who are 65 years olds at time t, and Nt,t+3o is the present value to the year of birth (t+30) of the average lifetime net tax payments—the generational account—of those who will be born 30 years from year t.

  • The term Pt,k stands for the time-t population of the generation born in year k.

  • The term r is the government’s real, before-tax, discount rate.

  • The index k in this summation runs from t-D where D is the maximum length of life for each generation, assumed to be 100 years.

  • The first summation on the left-hand side of (1) adds together the generational accounts of existing generations. The second summation on the left side of (1) adds together the present values of the generational accounts of future generations, discounted back to year t in the summation using the government’s real, before-tax return r.

  • The first term on the left-hand side of (1) expresses the present value of government purchases.

  • The remaining term on the right-hand side (Dt) denotes the government’s wealth, defined as financial liabilities minus the sum of its financial assets and the market value of its public enterprises. For Singapore, in the absence of a consolidated public sector accounts, this term includes only the net financial assets of the central government.

What is a Generational Account?

The generational account N t,k is defined by:


where K=max(t,k). In expression (2) Ts,k stands for the projected average net tax payment to the government made in year s by a member of the generation born in year k. The term Ps,k stands for the number of surviving members of the cohort in year s who were born in year k. For generations who are born prior to year t, the summation begins in year t and is discounted to year t. For generations born in year k>t, the summation begins in year k and is discounted to that year.

The term Ps,k/Pt,k indicates the proportion of members of cohort k alive at time t who will also be alive at time s. Hence, it represents the probability that a particular member of the year-k cohort who is alive in year t will survive to year s to pay the net taxes levied, on average, in that year on year-k cohort members. Hence,Nt,k is an actuarial present value. It represents the average value in the present of the amount of net taxes that members of cohort k will pay in the future, where the averaging is over not just net tax payments, but also survivorship.

A set of generational accounts is simply a set of values of Nt,k, one for each existing and future generation, with the property that their combined present value, when multiplied by the appropriate, generation-specific population counts at time t, adds up to the right-hand side of equation (1). Though we distinguish male and female cohorts in the results presented below, we suppress gender subscripts in (1) and (2) to limit notation.

Tax and Spending Profiles by Generation

In equation (1), generational accounts reflect only taxes paid less transfer payments received. Producing generational accounts require projections of population, taxes, transfers, an initial value of government net debt and a discount rate. The typical method used to project the average values of taxes and transfer payments by age and gender starts with the value of the aggregate amounts of each type of tax and transfer payment in the base year. These aggregate amounts are then distributed by age and gender based on relative age-tax and age-transfer profiles derived from cross-section micro data sets.

Equation (3) helps clarify the method of distributing tax or transfer aggregates in a particular year to contemporaneous cohorts. Again, to simplify the presentation the distinction between genders is omitted:


In (3), Ht stands for an aggregate tax or transfer amount in year t (i.e., income tax payments). The term Tt,t-40 is the average amount of income tax paid by the generation that is age 40 in year t. Rt,t-s is the relative distribution profile for income taxes in year t. Specifically, it stands for the ratio of the average income tax payment of members of the cohort born in year t-s to the average income tax payment of 40 year-olds in year t. Finally, Pt,t-s stands for the number of people in year t who were born in year t-s, i.e., it is the population size of the age cohort. Given Ht and the values of the Rt,t-s and Pt,t-s terms, one can use equation (3) to solve for Tt,t-40, To form Tt,t-s, the terms that enter equation (2) that are used to calculate each current generation’s account, note that


For all the years beyond the base one the following holds:


Hence, the age- and gender-specific average tax and transfer amounts are assumed to equal those for the base year, with an adjustment for growth.

Measures of Fiscal Imbalance Across Generations

1. In order to measure the generational imbalance one possibility is to assume that current fiscal regime apply only to currently living generations and that if a change in taxes and transfers is needed to restore sustainability, that would concern only future generations. Hence, given the Long-Term side of equation (1) and the first term on the left-hand-side of equation (1), one finds, as a residual, the value of the second term on the left-hand side of equation (1), the collective payment required of future generations measured as a time-t present value.

Based on this amount, the average present-value lifetime net tax payment of every member of each future cohort is calculated using the assumption that each successive future cohort pays the same share of its lifetime labour income in net taxes (faces the same lifetime net tax rate). Assuming that earnings from labour grow in line with labour productivity, the net lifetime taxes for members of each successive future cohorts will rise at the economy’s rate of labor productivity growth (g),

More formally, let N stand for the growth-adjusted generational account of future generations. N is the amount that each member of a future cohort would pay in lifetime net taxes if her lifetime labor income were the same as that of a current newborn. Hence, the actual amount the cohort born in year t+1 will pay is N(l+g). The actual amount the cohort bom in year t+2 will pay is N(l+g) 2. The actual amount the cohort born in year t+3 will pay is N(l+g)3, and so on. The value of JV IS found through the following equation:


Since N is the lifetime net tax payment of future generations adjusted for growth, it is directly comparable to that of current newborns, Nt,t, as both refer to net tax payments over the entire lifetime and are discounted back to their respective years of birth. If N equals Nt,t generational policy is balanced. If N exceeds (is smaller than)Nt,t future generations face larger (smaller) growth-adjusted lifetime net tax burdens than do current newborns.

2. A different method that allows a clearer distinction between the two concepts is to calculate the accounts for future generations assuming that they too face current fiscal policies (this amounts to applying to them the same relative age and gender profiles for taxes and transfers that apply to current individuals) and then to obtain a measure of what is needed to fill the gap. This amount is called the intertemporal budget gap (or IBG):

(7)IBG=Σs=0Gt+s(1+r)ts+DtΣs=0DNt,tsPt,ts -Σs=1Nt,t+sPt,t+s(1+r)ts

Once this gap is calculated, further, one could ask what immediate and permanent change in either taxes or transfers would be necessary to close the intertemporal budget gap IBG. Suppose, for example, to find the immediate and permanent percentage reduction in government purchases needed to achieve intertemporal balance. Denoting this percentage reduction by d, this is found solving the following equation:


As a second example, consider the immediate and permanent percentage increase in income taxes needed to’achieve generational balance. Calling this percentage increase v, this is found solving the following equation:

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  • Kotlikoff, Laurence, 1993, “From Deficit Delusion to the Fiscal Balance Rule: Looking for a Sensible Way to Describe Fiscal Policy,” The Journal of Economics, Seventh Supplement.

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  • Low, Linda and T.C. Aw, 1997, “Financial Support in Old Age: Singapore Case Study,” World Bank.


Prepared by Roberto Cardarelli (x38059) who is available to answer questions.


For a more detailed description see Cardarelli, Kotlikoff and Sefton (1999).


It is important to note that the generational accounting framework can only evaluate the generational imbalance between current and future generations and not past generations. The burden borne or benefits enjoyed by past generations is only taken into account through the inclusion of accumulated net wealth or debt in the intertemporal budget constraint.


A more technical exposition is contained in the Appendix.


It is worth stressing that this method does not impose the condition that public debt should be paid back, but only that fiscal policies should generate primary surpluses that allows the stock of debt to be serviced without recourse to further borrowing.


The age and gender profiles are meant to capture the status quo of fiscal policies. As they do not change in the future, the age–and Long-Term average tax and transfer amounts are equal to those for the base year, with an adjustment for growth. Apart from this scale factor, the aggregate amounts vary in the future only because of the changes in the demographic structure.


Alternative scenarios in which revenue from land leases is excluded from the generational accounts are also discussed to evaluate the sensitivity of the results.


This rate exceeds the real government Long-Term borrowing rate in most developed countries which seems justified given the uncertainties surrounding the revenue and expenditure flows being discounted. To further test the robustness of the simulations, results based on a range of alternative discount rates are presented.


Any other change in the economic structure (i.e., labor force participation rates and unemployment rate) and in immigration flows (beyond what is implicit in the demographic. projections) are ignored.


The distinction between men and women should not be taken too literally in this context, as the methodology does not capture the redistribution within the family (and thus between partners) of the burden and benefits associated with taxes and transfers.


One source of the estimated generational imbalance could be the implicit tax arising from the difference between returns on the CPF funds invested by the Government Investment Corporation and the returns actually credited to the members’ accounts (Asher, 1999). In the generational accounting framework, this tax emerges from the difference between investment income and debt servicing, which is capitalized in the stock of government wealth. This would also imply that the effective tax burden is substantially higher than measured tax rates. would suggest.


It should be noted that these are more conservative estimates than others in the literature. For example, Heller (1997) estimates the impact of aging and rising health care costs to result in an increase in health expenditures of less than 2 percentage points of GDP by 2030.


For a fuller discussion of Long-Term fiscal projections based on these assumptions, see Annex III of accompanying Staff Report.