MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: The Method of Generational Accounting 5

dv

Assumptions Underlying Generational Account Calculations

To produce generational accounts, we require projections of population, taxes, transfers, and government expenditures, an initial value of government net debt, and a discount rate. We consider the impact of total, as opposed to just federal, government. Typically, we assume that government purchases grow at the same rate as GDP, although in some cases we break these purchases down into age-specific components and assume that each component remains constant per member of the relevant population, adjusted for the overall growth of GDP per capita. This causes different components of government purchases to grow more or less rapidly than GDP according to whether the relevant population grows or shrinks as a share of the overall population.

Government infrastructure purchases are treated like other forms of purchases in the calculations. Although such purchases provide an ongoing stream rather than a onetime amount of services, they must still be paid for. Generational accounting clarifies which generation or generations will have to bear the burden of these and other purchases. For government debt, we measure the government’s net financial debt – its official debt less its official financial assets. We do not include the real assets of state enterprises in this measure, but instead subtract projected net profits from state enterprises from projected government spending. This procedure effectively capitalizes the value of these enterprises. loans