An International Comparison of Generational Accounts

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An International Comparison of
Generational Accounts

• Jaime Álvarez Bandrés
• Ignacio Establés Susán
• Jose Antonio Mairena Peral

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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

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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.

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1.What is the Generational accounting?

• 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.

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1.What is the Generational accounting?

• For most of the 17 countries considered in this
  book, generational accountings 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.

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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
  governments 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.

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2. Methodology and Assumptions

• 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.

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2. Methodology and Assumptions

• 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).

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3. The Demographic Transition
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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.

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4. Generational Accounts of Living Generations.

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4. Generational Accounts of Living Generations.

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4. Generational Accounts of Living Generations.
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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.

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5. Imbalances in Generational Policy

• 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.

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5. Imbalances in Generational Policy

• 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.

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6. Generational Accounting vs. Deficit Accounting

• It is interesting to compare generational
  accountings 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 countrys fiscal
  responsibility.

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Official defficit and debt as a share of GDP
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6. Generational Accounting vs. Deficit Accounting

• 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.

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6. Generational Accounting vs. Deficit Accounting

• 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

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6. Generational Accounting vs. Defficit Accounting

• Imposing higher net taxes on current generations
  by printing money.
• Countries addressing the roots of the problems by
  implementing major fiscal reforms.

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7. 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.

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7. Sensitivity of the results

• 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

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7. Sensitivity of the results

• 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.

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Table 4.6 Sensitivity to Growth and Discount
Rates, Case A
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Summary 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.

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Summary of Table 4.6

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

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8. Sources Of Generational Imbalances

• How much of the imbalance in generational policy
  in the various countries can be traced to the
  countrys demographic transition?
• And how much can be traced to its official net
  debt?

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To know the answer

• The demographics experiment.
• The zero-debt experiment.

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Table 4.8 Sources of generational imbalances.
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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.

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The ageing of world population
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The ageing of world population
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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.

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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.

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Table 4.9 Alternative ways to achieve
generational balance.
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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.

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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.

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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.

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Shocking results

• The worlds 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.

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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.

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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.

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THANK ALL OF YOU FOR YOUR ATTENTION!