When it comes to deficit reduction, politicians like to talk about “balance.” President Barack Obama wants a balance between additional cuts and revenue. Republican Rep. Paul D. Ryan wants a balance between total spending and taxes. Few politicians, however, are talking about the need for a balance between generations. That’s partially because our government does not even report the full impact that today’s fiscal policies will have on future generations. This must change.
Truth is, the trajectory of our federal budget represents a massive intergenerational redistribution of wealth. On the whole, older Americans and current retirees are set to receive a significant net financial benefit from public resources over the course of their lifetimes, with a massive bill for this spending to be passed on to the young and future generations. This policy path is both fiscally irresponsible and morally reprehensible. Pressure to change course might increase, however, if there were a clearer understanding of this reality among the public, media and elected leaders alike.
Fortunately, economists developed two innovative analyses — the fiscal gap and generational accounting — two decades ago to describe the true size of our fiscal imbalance and the repercussions it will have on future generations. These analyses were prepared by the Office of Management and Budget and included in the president’s budget during the final year of the first Bush administration and the first year of the Clinton administration. But amid efforts to downplay the long-term costs of shortsighted policies, the studies were eventually removed from the budget and attempts to revive them proved unsuccessful.
Notwithstanding this unfortunate history and thanks to a sustained push by a diverse group of concerned young Americans on Capitol Hill, Washington is beginning to give the fiscal gap and generational accounting another look.
On one hand, the way we currently measure our country’s indebtedness is inadequate. The advertised federal debt held by the public of $11.8 trillion does not capture the amount of money government has borrowed from itself and the vastly larger amount of money government has promised in future spending through programs such as Social Security and Medicare, along with other liabilities. Nor does it take into consideration the government’s ability to raise taxes or reduce spending to cover these obligations.
The fiscal gap does both. It is the present value difference between future projected spending (including servicing the official debt) and future taxes over an infinite time horizon. In 2012, the United States’ fiscal gap grew by $11 trillion to a mind-boggling $222 trillion — the largest of any country in the world relative to the economy. This analysis can be used to judge policies based on their ability to close our fiscal imbalance over the long term, not just reduce deficits over the next 10 years as is currently the practice.
On the other hand, the way we measure who will pay for our debt is also misguided. Your $53,000 “share” of the national debt as advertised on various debt clocks and elsewhere wrongly assumes we each carry the same burden and that we will all someday pay up. Not so. The burden will disproportionately fall on the young and unborn when the decisions we are delaying today come due.
Generational accounting measures the consequences that our growing fiscal imbalance will have on future generations. It calculates the difference between total lifetime taxes paid and government transfers collected by age cohort, assuming the fiscal gap is left only to future generations to close. According to the latest generational accounting published by the International Monetary Fund in 2011, taxes on future generations would have to increase by 21.5 points to close the fiscal gap. This analysis can be used to determine how policies distribute their costs and benefits across age groups, just as we now see how they are distributed across income levels.
Putting our fiscal house in order in a generationally balanced way should be an imperative for both parties. Congress can start by requiring the Congressional Budget Office to produce an annual fiscal gap and generational accounting report and, further, to produce similar analyses for all major fiscal legislation pending before Congress. This legislation can be a bipartisan achievement in the name of fiscal sanity and generational equity. In March, Sen. John Thune, R-S.D., took the first step by offering an amendment to the Senate budget resolution. More must follow.
We cannot continue to ignore the economic and moral injustice being wrought on future generations because of our inability or unwillingness to face the facts.
Laurence Kotlikoff is an economist at Boston University and co-author of “The Clash of Generations.” Nick Troiano is co-founder and national field director of The Can Kicks Back, a millennial-driven campaign to fix the national debt.