MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: The Method of Generational Accounting 4

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Generational Accounting versus Deficit Accounting

A final and critically important point to make about generational accounting is that the size of the fiscal burden confronting future generations (the second summation on the left-hand side of (1)), the generational accounts of newborn generations, and the imbalance in generational policy (measured as the difference in the accounts of newborns and the growth-adjusted accounts of future generations) are all invariant to the government’s fiscal labeling – how it describes its receipts and payments.

The same, unfortunately, is not true of the government’s official debt. As described in KotlikofT (1992), from the perspective of neoclassical economic theory, neither the government’s official debt nor its change over time — the deficit – is a well-defined economic concept. Rather these are accounting constructs whose values are entirely dependent on the choice of fiscal vocabulary. Stated differently, a government’s reported debt and deficit bear no intrinsic relationship to any aspect of its fiscal policy, including its generational policy. credit

For example, if one calls past and future U.S. social security contributions “loans” to the government and past and future social security benefit payments “return of principal plus interest on these loans” less an “old age net tax,” the U.S. government’s official debt becomes roughly $9 trillion larger than the “official” value. In terms of equation (1), this alternative, but equally legitimate choice of language entails a higher value of the generational accounts of all existing generations, apart from newborns, as well as a higher value of official debt. The larger value of the debt term on the right-hand side of the equation is exactly matched by a higher value of the first summation on the left-hand side of the equation. Consequently, the size of the second summation on the left-hand side of the equation — the collective net tax burden facing future generations ~ is unchanged.

Each choice of fiscal language raises or lowers the first summation on the left-hand side of (1) and the official net debt term on the left-hand side by exactly the same amount. Since there are an infinite number of ways to label each dollar given to the government by the private sector or given to the private sector by the government, there are an infinite set of alternative time series of the government’s official debt that can be constructed simply by describing past and future economic policy with different words 2 But none of these times series of debts and deficits, in of themselves, tells us anything about how the government is treating alternative generations. Hence, generational accounting’s message is not simply that we can do better than conventional deficit accounting in assessing the generational stance of fiscal policy, but also that deficit accounting, notwithstanding its routine use by every country in the world, is entirely.