Authors: Agustin Diaz, Jagadeesh Gokhale, and Kent Smetters
Abstract:
The Penn Wharton Budget Model’s microsimulation, which projects detailed future demographic changes consistent with past trends, is used to construct estimates of the U.S. federal fiscal and generational imbalances. The federal government’s fiscal imbalance (FI) calculated under current fiscal laws and purchases policies over the next 75 years equals $104.3 trillion, which is 8.0 percent of the present value of projected GDP (PVGDP) over that time horizon. Calculated in perpetuity, FI equals $244.8 trillion, which is 10.2 percent of PVGDP, also calculated in perpetuity. The FI/PVGDP ratio in perpetuity would be 11.5 percent under extension of provisions that are scheduled to expire under the Tax Cuts and Jobs Act of 2017.
Over the next 75 years, current-law FI as a share of the present value of federal expenditures equals 31.2 percent. As a share of the present value of federal revenues, it equals 41.5 percent. These figures are 35.5 percent and 52.7 percent, respectively, when calculated in perpetuity. When estimated in perpetuity, total federal debt outstanding ($27.5 trillion) accounts for 1.1 percent, Social Security plus Medicare Part A ($106.6 trillion) for 4.4 percent, and public purchases ($143.2 trillion) for 5.9 percent of FI as a share of PVGDP. Other federal transfer programs net of all non-payroll-tax receipts ($32.5 trillion) contribute a surplus of 1.4 percent of FI as a share of PVGDP.
The generational imbalance (GI) measure for Social Security and Medicare Part A – which shows the present value of net benefits in excess of taxes paid by past and currently alive generations equals $60.2 trillion. The imbalance on account of future-born generations equals $46.4 trillion. The paper provides a detailed breakdown of the distribution of prospective taxes net of transfers in present value (generational accounts) for population groups by birth-year, gender, race, and education.
Key Words: Taxation, Government Spending, National Debt, Fiscal Imbalance, Generational Accounting
JEL Classification Numbers: H2, H5, H6