Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities

Views stated in Policy Discussion Papers are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted, provided that the source is credited. Please send copies of reprinted materials to the editor. 2003, for helpful comments on drafts of this paper. The authors also thank the White House Offi ce of Management and Budget for providing long-range Budget projections, Felicitie Bell of the Social Security Administration for providing long-range population projections and demographic assumptions used for the 2002 Social Security Trustees report, This paper describes the defi ciencies of the measures used to calculate the federal budget, make revenue and spending projections, and assess the sustainability of current fi scal policies. The nature of the defi ciencies hides the tremendous impact that Social Security and Medicare commitments will have on the budget in the future, given the way the programs are structured currently and the momentous demographic shift underway as the baby boom generation approaches retirement age. This paper proposes two new simple measures that will enable government offi cials and the public to calculate more accurately the costs of maintaining these programs into the relevant future. The measures provide a better understanding of the costs involved, when they will be incurred, and by whom. The measures also provide a way to meaningfully compare the various solutions that have been proposed for dealing with the impending fi scal crisis that will be caused by Social Security and Medicare. 3. This requirement assumes that the economy is characterized by " dynamic effi ciency. " A dynamically ineffi cient economy is one with excessive capital relative to the labor force—one where living standards can be improved by discarding capital. Abel, Mankiw, Summers, and Zeckhauser (1989) suggest that the U.S. economy has been characterized by dynamic effi ciency since 1929.