Spending Beyond Our Means: How We Are Bankrupting Future Generations

By Jagadeesh Gokhale

Current U.S. fiscal policy, including the recently concluded “fiscal cliff” debt deal, is placing an enormous financial burden on today’s children and on future generations in order to deliver government benefits to current middle-aged workers and their elders. Standard government accounting methods hide that intergenerational transfer from the public and make it difficult to calculate how large the transfer is. Intergenerational resource transfers will grow larger as the composition of budget receipts and expenditures changes with relatively faster growth of age- and gender-related social insurance programs. Intergenerational redistributions through federal government operations could substantially affect different generations’ economic expectations and choices and exert powerful long-term effects on economic outcomes.

This paper updates earlier calculations of generational accounts and fiscal and generational imbalance measures based on the Congressional Budget Office’s (CBO) March 2012 Budget Outlook Update. It finds that the fiscal imbalance embedded in the federal government’s current law (Baseline) policies amounts to 5.4 percent of the present value of future U.S. gross domestic product (GDP), or 11.7 percent of the present value of future payrolls. However, given past precedents, federal current-law policies are unlikely to be implemented.

The CBO’s “Alternative Fiscal Scenario,” which eliminates several current-law policies so as to be consistent with past congressional practice, would increase the fiscal imbalance to 9.0 percent of the present value of GDP, or 19.7 percent of the present value of payrolls. Generational accounting calculations show that under both Baseline and Alternative policies, today’s middle-aged workers would receive such large federal transfers by way of present-valued Social Security and Medicare benefits that their prospective lifetime net tax burdens are almost fully eliminated.

You can download the white paper pdf file at CATO.org

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