• Large Future Deficits
• Demographics
• Future Costs
• Macroeconomic Problems
• Slow Economic Growth
• Generational Accounting
• Increased Interest on Debt
• Capital Flight
• Economic Solutions
• Social Security
• Medicare
• Discretionary Spending
• Taxes
• Political Limitations
• Ideological Difference
• Partisan Politics
• Public Awareness
• Deficit Politics
• Entitlement Spending
• Policy Recommendations
• Complete Recommendation


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Generational Accounting

When addressing the impact of the future federal deficit, generational accounting offers a new perspective.  Generational accounting is a valuation of the imbalances of the future deficit.  The fiscal imbalance is calculated by adjusting the stream of promises of future benefits into today’s current dollar value, and then subtracting from that the stream of expected revenues.  A 2002 study prepared by Kent Smetters at the request of the U.S. treasury secretary valued the current fiscal imbalance at $45 trillion.  The new prescription drug benefit has a calculated generational imbalance of $6 trillion; this brings the total calculated fiscal imbalance to $51 trillion.[i]  Another generational accounting measure, the generational imbalance, measures the effect in today’s dollars of the growing deficits on the generations who may be required to make good on them through higher taxes.  Laurence Kotlikoff and Scott Burns, creators of generational accounting, suggest “for generations now alive, the net tax rate is roughly 20%. Assuming we do not raise the net taxes of current generations, do not cut government purchases, and do not renege on official and implicit debt, we find that future generations face a lifetime net tax that is twice the rate that we’re paying.”  Such high tax rates induce the creators of generational accounting to refer to the burdens of such debt and tax rates as “fiscal child abuse.”  Through continual demand for their entitlement benefits and their ignorance of the long-term deficit effects, today’s generations are unknowingly overburdening generations such as ours.[ii]

Such calculations are why Harvey Rosen, Chairman of the President’s Council of Economic Advisors, says, "when we get to the long run I think we're facing some panic."[iii] Alice Rivlin, a senior member of the Brookings Institution writes, “today’s children, young adults, and their descendents will have to pay more because past generations have been fiscally irresponsible. At the same time, deficits and rising interest costs are likely to put downward pressure on spending for education, nutrition and health care that could make today’s children more productive and thus better able to pay these future obligations.” [iv]

Unless the government finds a way to reduce its debt, its current fiscal decisions will impose hardships on future generations.  These generations will have the privilege of being born into an economy with lower incomes and higher tax rates; each baby born today in the U.S, not only will have the distinction of being a U.S. citizen, but will also have about a $13,000 share of the government’s debt. All these negative implications can be linked back to the large deficit accumulated by the shortsighted generations before them. [v]