Youma Noor Rachma

A1R6/31402000162

GENERATIONAL ACCOUNTING

Source:https://www.questia.com/library/journal/1G1-18291918/generational-accounting

Writer : LJ Kotlikoff - NBER Reporter,1995, questia.com

Generational accounting is a method of long-term fiscal analysis and planning that developed
with Alan J. fiscal policy, considers its shortcomings, and finally suggests areas for future
research.

How It Works and What It Does

Generational accounting is based on the government's intertemporal budget constraint that

requires that either current or future generations pay the government's bills . Subtracting from
these bills the present value of projected future net tax payments of current generations yields the
present value net tax burden facing future generations that is implicit in current policy. The net
tax burden facing future generations divided by the present value of their projected labor
earnings will produce a lifetime net tax rate. By comparing the lifetime net tax rates facing future
generations with those facing current newborns , one can assess the sustainability of current
fiscal policies.

For example, if the lifetime net tax rate facing future generations is higher than the rate facing
newborns, then maintaining current policy through time - which means taxing successive new
generations at the same rate as current generations - is not sustainable, because it won't pay all of
the government's bills. Generational accounting also calculates the changes in net taxes of
generations, both living and future, that result from changes in fiscal policies. Security retirement
benefits will help current older and harm current younger and future generations, according to
generational accounting. Specifically, this method records the reduction in the present value net
tax payments of older generations arising under the policy as well as the increase in the present
value net tax payments of young and future generations .