MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: The Method of Generational Accounting 3

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Assessing the Fiscal Burden Facing Future Generations

Given the right-hand-side of equation (1) and the first term on the left-hand-side of equation (1), we determine, as a residual, the value of the second term on the left-hand side of equation (1) — the collective payment, measured as a time-t present value, required of future generations. Based on this amount, we determine the average present value lifetime net tax payment of each member of each future generation under the assumption that the average lifetime tax payment of successive generations rises at the economy’s rate of productivity growth. This makes the lifetime payment a constant share of lifetime income. Controlling for this growth adjustment, the lifetime net tax payments of future generations are directly comparable with those of current newborns, since the generational accounts of both newborns and future generations take into account net tax payments over these generations’ entire lifetimes and are discounted back to their respective years of birth.

Another way of measuring the imbalance of fiscal policy, illustrated below, is to ask what permanent change in some tax or transfer instrument, such as an immediate and permanent increase in income taxes or reduction in old-age social security benefits, would be necessary to equalize the lifetime growth-adjusted fiscal burden facing current newborns and future generations. Because such policies satisfy the government’s intertemporal budget constraint, they also sustainable. loans