an international comparison of generational accounts jaime Álvarez bandrés ignacio establés...

An International Comparison

of Generational Accounts

Jaime Álvarez BandrésIgnacio Establés Susán

Jose Antonio Mairena Peral

Index

1.What is the Generational accounting? 2. Methodology and Assumptions 3. The Demographic Transition 4. Generational Accounts of Living Generations 5. Imbalances in Generational Policy 6. Generational Accounting versus Deficit Accounting 7. Sensitivity of the Results 8. Sources of Generational Imbalances 9. Restoring Generational Balance? 10. Summary and Conclusion

1.What is the Generational accounting?

It is a method of accounting for redistribution of lifetime tax burdens across generations from social insurance,, including social security and social health insurance .

For example, if a fall in labor-force growth from an earlier

fall in the birth rate is projected to increase the proportion of retirees to the labor force, generational accounting might examine different projected changes in taxes or program benefits to finance the change.


Generational angst-the fear that we are bequeathing enormous fiscal bills to our children-is global, affecting countries as diverse as Japan and Brazil.

Generational accounting, as we have seen, helps countries confront, although not necessarily allay, their generational anxieties.


For most of the 17 countries considered in this book, generational accounting’s message is highly unpleasant. The reason is that most of these countries are running fiscal policies that if left unchanged will sentence their children to sky-high rates of net taxation.

2. Methodology and Assumptions

As detailed in point 3, generational accounts are defined as the present value of taxes paid minus transfer payments received (net taxes) that individuals of different annual cohorts (generations) pay on average over their remaining lifetimes.

Generational accounts are based on the government’s intertemporal budget constraint, which implies that the sum of future government consumption spending has to be equal to the sum of all future net taxes (taxes minus transfers all in present value terms) plus current government net wealth.


If future generations face, on a growth-adjusted basis, a higher lifetime net tax burden than do current newborns, current policy is neither sustainable nor generationally balanced.

However, in this case, generational balance can be achieved by reducing the fiscal burden facing current generations rather than the other way around.

Generational accounting depends on various assumptions, in particular about future economic developments and demographic trends.


The authors who wrote these point chose the data to be used in their accounts. They also produced their accounts themselves, using, in most cases, the original generational accounting software package developed by Alan Auerbach, Jagadeesh Gokhale, and Laurence Kotlikoff.

We present generational accounts treating educational expenditure both as a government purchase (case A) and as transfer payments (case B).

3. The Demographic Transition

4. Generational Accounts of Living Generations.

When people are young, they receive transfers (e.g., child benefits or educational allowances) and pay consumption taxes.

During their working lives, they continue to pay consumption taxes but also pay taxes on their labor and capital income in the form of personal income taxes and payroll taxes.

The absolute amount of net transfers declines during retirement as the remaining lifetime

shortens.

4. Generational Accounts of Living Generations.

5. Imbalances in Generational Policy 5. Imbalances in Generational Policy

The comparison of the generational account facing newborns with that facing future generations indicates the degree of imbalance in generational policy.

Take the United States, the difference between these numbers is the absolute imbalance.

Japan, Germany, Italy, the Netherlands, Norway, and Belgium have larger percentage imbalances than the United States under cases A and B.


The country with the largest absolute imbalances is Japan.

The German, Italian, Dutch, and Brazilian imbalances are also grave.

Australia, Denmark, and France have substantial imbalances that leave their descendents facing 30 to 50 percent higher lifetime net tax rates.

Canada appears to be essentially in generational balance.


The remaining three countries-New Zealand, Thailand, and Sweden-have negative imbalances.

Australia is another country whose recent policy measures have had a significant impact on its generational accounts.

6. Generational Accounting vs. Deficit 6. Generational Accounting vs. Deficit AccountingAccounting

It is interesting to compare generational accounting’s assessment of fiscal sustainability with that suggested by official deficits and debts.

In a theoretical perspective,there is no intrinsic connection between nations’ generational imbalances and their deficit or debt positions…

…but this finding should be of interest to those who believe deficit or debt levels represent useful criteria for assessing a country’s fiscal responsibility.

Official defficit and debt as a share of Official defficit and debt as a share of GDPGDP


Table records government deficits, primary deficits levels of gross debt and levels of net debt for our 17 countries.

Although Japan has the largest and Norway one of the largest generational imbalances, the two countries have the lowest ratios of net debt to GDP.


International Monetary Fund and the Europea Union have different estrategies.

IMF uses budget deficit targets in determining structural adjustment policies.

UE has adopted a deficit target as the principal requirement for membership in its proposed single currency monetary union.

European Monetary union is worth bearing the following in mind:

6. Generational Accounting vs. Defficit 6. Generational Accounting vs. Defficit AccountingAccounting

Imposing higher net taxes on current generations by printing money.

Countries addressing the roots of the problems by implementing major fiscal reforms.

7. Sensitivity of the results7. Sensitivity of the results

Estimates of generational accounts are based on the assumption that except for demographic influences, no other fundamental changes in the economy occur.

But labor supply could increase if labor participation increases.

This would raise labor tax revenues and reduce transfers.


If population aging were slower than assumed here the imbalance against future generations would be reduced.

This would result from a larger number of taxpayers available to help government expenditures.

The results are also sensitive to assumptions about productivity growth and the discount rate:


For a given discount rate, higher productivity growth increases the absolute amounts of net tax payments of both existing and future generations.

For a given productivity growth rate, a higher discount rate reduces these present value amounts.

Table 4.6 Table 4.6 Sensitivity to Growth and Sensitivity to Growth and Discount Rates, Case ADiscount Rates, Case A

Summary of Table 4.6Summary of Table 4.6

The absolute sizes of the accounts of current newborns as well as future generations are fairly sensitive and..

… the values of both variables move in the same direction in response to changes in the rates of productivity growth and interest.

Consequently, the absolute generational imbalance in many countries is rather invariant to the choice of these rates.

Summary of Table 4.6Summary of Table 4.6

Finally, the sensitivity of the generational accounts to growth and interest rate assumptions depends on the country in question.

8. Sources Of Generational Imbalances

How much of the imbalance in generational policy in the various countries can be traced to the country’s demographic transition?

And how much can be traced to its official net debt?

To know the answer:

The demographics experiment.

The zero-debt experiment.

Table 4.8: Sources of generational imbalances.

Results of the experiments:

Demographics make a very substantial difference to the imbalance in almost all of the countries: demographics are very important.

Eliminating the government official net debt has a range of impacts on generational imbalances: it is not so important.

The ageing of world population:

The ageing of world population

9. Restoring Generational Balance?

It represents an economic imperative.

Countries that take no action to achieve generational balance will find their generational imbalances worsening over time.

Two ways of eliminating generational imbalances by the government:

Force those now alive to pay higher net taxes by raising their taxes.

Cutting their transfer payments or reduce the time path of its spending.

Table 4.9: Alternative ways to achieve generational balance.

About table 4.9:

Restoring the balance between newborns and future generations would require immediate and permanent big cuts in government purchases in most of the countries.

But a few of them need to raise government spending since their baseline generational imbalances are negative.

How one allocates educational expenditures does not matter much to the adjustments needed to achieve generational balance.

Considerations:

Combinations of the policy instruments could achieve the same end, and less would be required of any single policy instrument.

Larger adjustments are needed if the policies under consideration are not enacted immediately.

Different types of adjustments would affect different currently living generations differently.

10. Summary and conclussions

Policymakers take official budget deficits and debts as their primary fiscal indicators, and they are not.

The longer a country waits to adjust, the more painful the ultimate adjustment will be. Adjusting too little in the short run is a form of waiting too long to adjust.

Shocking results:

The world‘s leading industrial powers (United States, Japan and Germany) all have severe imbalances in their generational policies.

Unless they do something they will face dramatically higher rates of lifetime net taxation.

Situation of the countries studied:

Japan, Italy, Germany, the Netherlands and Brazil have extreme imbalances.

The United States, Norway, Portugal, Argentina and Belgium have severe imbalances.

Australia, Denmark and France have substantial imbalances.

Canada appears to be essentially in generational balance. New Zealand, Thailand and Sweden have negative

imbalances.

Final conclusions:

For most of the studied countries, what they need to do to solve the problem will be very unpleasant.

Although each country may respond differently, those with sizable generational imbalances all need to act immediately.

The less those now alive pay, the larger the amounts their descendants will pay.

THANK ALL OF YOU FOR YOUR ATTENTION!

an international comparison of generational accounts jaime Álvarez bandrés ignacio establés...

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