Fiscal Policy and Educational Attainment in The United States: A Generational Accounting Perspective

Economica (2007) 74, 329–350
doi:10.1111/j.1468-0335.2006.00546.x
Fiscal Policy and Educational Attainment in the

United States: A Generational Accounting
Perspective
By XAVIER CHOJNICKIw and FRÉDÉRIC DOCQUIERz
wCADRE, University of Lille, and CEPII
zFNRS and IRES, Catholic University of Louvain
Final version received 15 December 2005.
In this paper we investigate the consequences of the rise in educational attainment on US

generational accounts. We build on the 1995 existing accounts and disaggregate them per
schooling level. Contrary to medium- and high-skill newborns, we show that low-skill
newborns are characterized by negative generational accounts. Compared to the results
obtained with the traditional methodology, our baseline forecast is more optimistic.
Nevertheless, the rise in educational attainment is not strong enough to restore the
generational balance. Balancing the budget requires increasing taxes by 1.2% or reducing
transfers by 2.7%. Our results are robust to the main assumptions.
INTRODUCTION
Since the seminal studies by Auerbach, Gokhale and Kotlikoff (1991; 1994)
and Kotlikoff (1992), generational accounting has usually been perceived as a
meaningful way to evaluating the sustainability of fiscal policy. It builds on an
intertemporal treatment of the government budget constraint: at any date, the
present value of government purchases must be covered by the current net
public wealth, the present value of the net taxes that will be paid by living
people over the rest of their lifetimes, and the present value of the net taxes that
will be paid by future generations over their whole lifetimes. The basic
questions are: (i) What burden must the government leave for future
generations if it is to remain solvent? and (ii) Is the resulting fiscal treatment
of future generations identical to that of the current newborns?
Economically, there is no reason for equalizing individual taxes and
transfers. Most fiscal regimes involve high taxes for high-income individuals
and lower taxes for less productive workers. In the same way, if one generation
is economically more productive than another (for example because its
proportion of rich people is higher), it seems justified to make it pay more taxes
or receive less transfers. The generational accounting methodology partially
takes account of differences in generational wealth by comparing generations
in terms of fiscal pressure rather than gross burden. Using balanced growth
assumptions, the classical methodology defines the generationally balanced
policy as a situation in which individual taxes and transfers increase at the
same pace as labour productivity. However, existing generational accounting
exercises rely on very simple assumptions about the changes in labour
productivity and/or lifetime labour income across generations. Usually, these
changes are related to exogenous growth rates that have no explicit link with
the skill composition of the generations. Hence existing studies do not take
account of an important source of heterogeneity within and between
r The London School of Economics and Political Science 2006
330 ECONOMICA [MAY
generations, i.e. the rise in educational attainment of successive cohorts.

Although such a rise affects the growth rate of labour productivity, it also
influences the average age profile of taxpayers and recipients of transfers over
time.
The purpose of this paper is to revisit the generational accounts for the
United States developed by Gokhale, Page and Sturrock (1999) (referred to
below as GPS) by introducing skill heterogeneity into their accounting
framework. GPS demonstrated that US fiscal policy is unsustainable and
generationally imbalanced. They evaluated the fiscal pressure imposed on a
generation by its lifetime net tax rate, i.e. the ratio of the present value (at
birth) of net taxes that one generation has to pay over its lifetime to the present
value of its lifetime income from selling its labour. They showed that the
lifetime net tax rate of future generations amounted to 49.2%, compared with
28.6% for the current newborns.
However, such a framework, with a single representative agent within each
generation, fails to capture the evolution of skills. In this paper we demonstrate
that it is crucial to introduce skill heterogeneity, for two main reasons.
First, the age profile of taxes and transfers is highly dependent on
educational attainment. According to our estimates, the average lifetime
income of a low-skill individual amounts to $81,373, compared with $174,293
for a medium-skill worker and $311,540 for a high skill worker. Conversely,
the present value of public benefits received by an individual over a whole
lifetime amounts to $58,063 for the low skilled, $30,974 for the medium skilled
and $21,373 for the highly skilled.
Second, the skill composition of the population changes dramatically over
time and is likely to evolve in future years. Figures taken from Lee and Miller
(1997) reveal that in 1995, 64% of the US population aged 80 had not
graduated from high school, 24% had a high school diploma, and only 12%
had a higher qualification. For the cohort aged 30, these numbers were 13%,
35% and 52% respectively. Obviously, skill heterogeneity between living
generations is very marked. According to Lee and Miller’s (1997) forecasts,
these proportions are likely to continue to change in the future, converging to
about 11%, 29% and 60%, respectively, for future cohorts of adults’
completed schooling.
The rise in educational attainment can be explained by several factors such
as higher public expenditures on education, a rise in the skill premium, etc.
Over the next few decades, the increase in human capital per worker is
inevitable as new, well educated cohorts progressively replace older, less
educated, ones. Unless drastic changes in the returns to skill occur (what would
be inconsistent with forecast levels of educational attainment in the future), the
rise in education levels is likely to generate fiscal gains for the government. We
argue that education is a key parameter for evaluating the long-run
sustainability of current fiscal policy.
By disregarding such changes, the generational accounting technique
induces two biases. First, the usual technique will probably lead to an
underestimation of the net payments by living cohorts.1 Taking account of
specific profiles by level of schooling and changes in the skill composition of
living cohorts allows us to predict the net taxes for future years more
accurately. Second, evaluating the lifetime net tax rate of future generations
2007] FISCAL POLICY AND EDUCATIONAL ATTAINMENT 331
must account for the real lifetime income from the labour of these cohorts. By
disregarding the skill structure of future generations, the accounting technique
is likely to underestimate the lifetime labour income of such cohorts.2
This paper shows that the rise in educational attainment strongly modifies
GPS’s conclusion. To allow comparisons, our analysis is also based on the
1995 fiscal year, and our adjustment calculations rely on the counterfactual
hypothesis that all changes began in 1995. Our conclusions are more optimistic
and raise numerous issues about: (i) educational policies and social mobility
(how can the incentives for education be increased? will the cost of increasing
average schooling levels exceed the fiscal gains?); (ii) the political sustainability
of current fiscal policy (if the government deficit decreases, will there be fiscal
pressure to reduce taxes or to increase transfers?) and (iii) the structure
of the labour market (can these fiscal gains survive the increasing supply of
skills?). Nevertheless, the sole purpose of our contribution is to compute the
impact of educational changes on the government budget constraint, all other
things being constant, i.e. taking the economic environment as given.
Consequently, our results must be appreciated exclusively in terms of fiscal
sustainability.
The rest of this paper is organized as follows. Section I discusses data issues
and the calibration of net tax profiles by age and education level. Section II
considers methodological issues of generational accounts with skill hetero-
geneity. As in GPS, our basic assumptions about the growth rates of per capita
taxes and benefits build on the official projections of the Congressional Budget
Office (CBO). The term ‘fiscal policy’ then reflects both the current age profile
of net taxes (by age and educational level) and official growth rates for per
capita amounts. Generational accounts by skill level are computed in Section
III. Our results indicate that low-skill newborns are characterized by a negative
generational account ( 15.4% of their lifetime labour income). However,
lifetime net tax rates for medium and high-skill newborns are positive,
amounting to 26.8% and 32.3%, respectively.
Taking account of the rise in educational attainment has a strong impact
on the results. Compared with GPS, we show that, in our baseline scenario, the
total burden left for future generations is reduced by about 30.7%.
Nevertheless, the dramatic rise in educational attainment does not restore
fiscal sustainability. Balancing the long-run deficit requires taxes to be
increased (by about 1.2%) or transfers reduced (by about 2.7%). This
contrasts with GPS’s study, which suggests that restoring the generational
balance in 1995 would require all transfers to be cut by 17.5% or all taxes
increased by 8.2%.
Section IV describes a similar exercise, when public education expenditure
is treated as a transfer rather than as part of government purchases. Similar
results are obtained, but the government deficit becomes slightly higher than in
our baseline scenario. A sensitivity analysis is presented in Section V. Our
results are quite robust to growth and discounting assumptions, to the
treatment of education spending and to the evolution of the skill premium.
They are more sensitive to assumptions about the schooling level of
future generations. Section VI summarizes our conclusions. An Appendix
provides the mathematical tools for generational accounting with hetero-
geneous skills.
332 ECONOMICA [MAY
I. DATA ISSUES
Estimating the age profiles of taxes and benefits for a reference year is the
building block for any longitudinal calculation. In this paper we use GPS’s
estimates of the profiles of men and women in 1995. We aggregate men’s and
women’s profiles using gender weights by age. These profiles cover six types of
tax (labour income taxes, FICA taxes, excise taxes, capital income taxes,
seignorage taxes and property taxes), seven types of benefit (OASDI, Medicare,
Medicaid, unemployment insurance, general welfare, AFDC and food stamps)
and three items of government purchases (education expenditures, federal
government purchases and state government purchases). The age profiles are
scaled so as to match the aggregated observations (i.e. the observed proportion
of GDP). The bold lines in Figure 1(a) and (b) represent the total taxes and
total benefits paid or received (excluding education spending) by a
representative individual in each age cohort in 1995. The bold line in Figure
1(c) gives the difference between taxes paid and benefits received. It appears
that net taxes are positive for individuals aged 15–70 (net contributors) and
negative for individuals aged over 70 (net beneficiaries).
These representative profiles depict the weighted average of net taxes paid
by all US residents in 1995. The age-specific amounts are thus dependent on the
average characteristics of each age group, in particular their average skill levels.
In this study, we disaggregate each tax or benefit item of the GPS dataset by
educational level. Three educational levels were distinguished: less than high
school diploma (oHS), high school diploma only (HS), and more than high
school diploma (4HS). Two statistical sources were used:
1. For labour income taxes, capital income taxes and OASDI benefits, we used
data extracted from the PSID (Panel Study on Income Dynamics3) of the
US population aged 20 and over in 1993. After elimination of illogical
information and non-responses, we computed the representative profiles for
these items from 17,943 observations. For those aged under 20, we assumed
that the profiles were identical, irrespective of education. PSID data were
also used to compute the lifetime labour income for each level of schooling.
2. For other items of taxes and benefits (including public education expendi-
tures), we used the profiles estimated by Lee and Miller (1997) by educational
level, cohort and immigration status. These profiles were based on 1994 and
1995 data from the CPS (Current Population Surveys). For children (aged 0–
19), education was forecast on the basis of parental education and ethnicity.
We did not distinguish between immigrants and natives.
All these disaggregated profiles were then calibrated so as to be consistent

with the GPS averages. Figure 1(a)–(c) gives the decomposition by schooling
level of total taxes, total benefits and net taxes for each age group. The impact
of educational attainment is mainly on taxes: at age 60, the taxes paid by a
high-skill individual are six times as great as those paid by a low-skill
individual. Smaller differences are evident in benefit profiles. In terms of net
taxes, low-skill agents are obviously the main beneficiaries of fiscal policy,
while medium and high-skill agents are net contributors. At age 60 the ratio of
net taxes between a high- and a medium-skilled individual is about 3.5 to 1.
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96
< HS HS > HS GPS average
FIGURE 1(a). Tax profile by age and education (present value in 1995 dollars).
25,000
20,000
15,000
10,000
5,000
0
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96
FIGURE 1(b). Transfer profile by age and education (present value in 1995 dollars).
40,000
30,000
20,000
10,000
0
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96
−10,000
−20,000
FIGURE 1(c). Net tax profile by age and education (present value in 1995 dollars).
334 ECONOMICA [MAY
Hence it is indisputable that changes in the educational structure will strongly

affect the sustainability of current fiscal policy.
II. METHODOLOGY AND ASSUMPTIONS

Let us now introduce the disaggregated net tax profiles in the generational
accounting framework. The starting point of generational accounting is the
government’s intertemporal budget constraint. In the base year (1995), the sum
of the public net wealth and the present value of prospective aggregate net
payments by living and future generations must equalize the present value of
prospective public purchases. We now present a description of the main
methodological choices.
The present value of payments by living generations (PVL)

The PVL sums the generational accounts of all the members of living
generations. By ‘generational account’, we mean the present value of net taxes
that a member of a cohort will pay over the rest of his or her life under the
assumed fiscal policy. Evaluating the accounts of living generations then
requires a long-run calculations relying on some crucial assumptions about the
demographic size of each generation, its educational structure, the evolution of
per capita taxes and benefits and the economic environment.
Population forecasts Our baseline scenario uses the intermediate population

projection of the Social Security Administration (SSA). This projection is
based on a rise in life expectancy (which can be partially related to a rise in
educational attainment) and an increase in the proportion of immigrants in the
US population. The SSA forecasts were extended beyond 2070 by GPS
(assuming that fertility, mortality and net immigration rates remain at their
2070 level). This scenario includes a sharp increase in the old-age dependency
ratio (i.e. the number of people aged 65 þ as a percentage of the number of
people aged 15–64). The ratio was 19% in 2000 and is expected to reach more
than 33% in 2050 and about 40% in 2100.
Educational attainment We used data on the skill composition of living US

cohorts in 1995 taken from Lee and Miller (1997). For the population aged 20
and over, these data correspond to the education levels measured in the
Current Population Surveys (CPS). For the population aged 0–19 (those
turning 20 between 1996 and 2015), Lee and Miller (1997) forecast educational
attainment on the basis of their parents’ level of education and ethnicity. We
assume the skill structure of future cohorts (i.e. those aged 20 after 2015) as
constant. The resulting projection lies somewhere between the ‘low’ and the
‘high’ projections provided by Cheeseman Day and Bauman (2000). In 1995,
52.0% of the population aged 30 had a diploma higher than high school,
compared with 35.0% who had merely graduated from high school and 13.0%
who did not even have a high school diploma. Among those aged 60, these
shares were, respectively, 36.6%, 36.9% and 26.5%. For newborns, we predict
60.2%, 28.9% and 10.9% respectively. Figure 2(a) shows that the main
70%
60%
50%
40%
30%
20%
10%
0%
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
<HS (%) HS (%) >HS (%)
FIGURE 2(a). Population shares by educational attainment (% of the total population).
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GPS This study
FIGURE 2(b). Common growth rate of labor income per capita (same growth rate per educational
group).
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
− 0.5%
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070
− 1.0%
Maddison GPS This study Average Madison 1960-2000
FIGURE 2(c). Growth rate of the US GDP per capita (historical data and projections).
changes in educational attainment (as measured by the share of each

educational group in the total US population) occurred before 1995 and
thus mainly affected living generations. After 1995, educational forecasts reveal
only small changes in educational attainment.
Profiles of taxes and transfers The net tax profiles of each educational group
are assumed to be stable over time. For example, the work effort of educated
336 ECONOMICA [MAY
older Americans in 2050 is assumed to be equal to the work effort of educated

older Americans in 1995. It could also be argued that the rise in educational
attainment will have an impact on the return to skill, and will reduce the gap
between skilled and unskilled workers even though this did not happen in the
past. (Between 1970 and 2000, the return to skills increased despite a
remarkable rise in educational attainment.) Although endogenizing the
changes in the tax profiles is beyond the scope of our accounting study,
we will provide a simple sensitivity analysis in Section IV. Given the absence of
life table by educational attainment, we have disregarded the effect of
heterogeneity in mortality (life expectancy is usually higher for the high-skilled)
on aggregated taxes and transfers.4
The evolution of taxes and transfers We took our growth rates of per capita
taxes and benefits from the GPS study. These in turn built on the reference
projection of the Congressional Budget Office (1997a, b) through 2070.
A growth path was calculated for each item of tax and benefit. We applied
these growth rates to per capita amounts paid (or received) by the members
of each educational category. For a given path of growth rates, our fiscal
projections are affected by changes in educational structure and demo-
graphic size (although the GPS/CBO aggregates are affected only by the
demography).
Does our procedure involve double-counting the effect of the rise in
educational attainment on productivity growth? This would clearly be the case
if the CBO growth assumptions reflected expected changes in human capital. In
that case an alternative scenario would be to calibrate the growth rates so as to
match the CBO aggregate projections for each item. We did not follow this
procedure, for three reasons. First, the CBO projection does not take account
of the rise in educational level of the population. Second, as shown on Figure
2(b), our baseline scenario using per capita amounts is consistent with the 1.2%
exogenous growth rate fixed for the post-2070 period. (The GPS scenario based
on CBO aggregates induces smaller wage increases in the transition period.)
Finally, as shown in Figure 2(c), our scenario predicts a growth rate of US
GDP per capita (sum of labour income and capital income per capita) which is
very similar to the average growth rate experienced between 1960 and 2000.
Consequently, our aggregated projections do not correspond to those of the
Congressional Budget Office.
Other assumptions
The present value of government purchases (PVG) is the discounted sum of
government purchases (state and federal purchases, including educational
expenditures) in 1995 under the assumed fiscal policy. The baseline scenario
builds on the GPS study. We used the path of government purchases simulated
by the Congressional Budget Office up to 2070. Beyond 2070, government
purchases are assumed to grow by 1.2% per year. Note that government
purchases include expenditure on public education. It could be argued that our
baseline assumption is incompatible with the future rise in school attendance.
For this reason, in Section IV we examine an alternative scenario in which
education expenditures are treated as transfers (i.e. they vary with changes in
school attendance). The growth rate of individual taxes and transfers in the
PVG beyond 2070 is also set at 1.2%. The baseline discount rate is 6%. The
public net wealth is the only observable item of the budget constraint: as in the
GPS study, it amounted to $2.1 trillion in 1995.
Balancing the budget constraint

Following GPS, we proceeded as follows to obtain generational accounts for
living and future generations. Using assumptions about the time path of
government purchases and individual amounts of tax and transfer for living
generations enabled us to derive the present value of government purchases
and payments by living generations. It was also possible to compute the
hypothetical generational accounts of future cohorts under the same fiscal
policy as for living cohorts. Combining these amounts into the government
intertemporal budget constraint, we computed the fiscal adjustment required to
balance the budget. This adjustment affects taxes and/or transfers from 1995
onwards. Hence it impacts on the situation of both living and future
generations. Depending on the type of adjustment we opted for (through
taxes or transfers), we computed ‘adjusted’ generational accounts for living and
future generations that were budgetarily sustainable. Finally, these ‘adjusted’
payments made by the newborns and individuals not yet born were compared
on a lifetime basis. The technical appendix describes our formal model.
III. BASELINE RESULTS

The generational accounts of living generations are shown in Table 1. It is
clearly evident that the generational account of a low-skill newborn is negative.
Over their whole lifetime, unskilled agents are expected to receive more in
transfers than they pay in taxes to the government. Conversely, the gene-
rational accounts of medium- and high-skill individuals are positive. More
particularly, the average generational account of a high-skill newborn is twice
that of a medium-skill newborn. It is also worth noting that the generational
accounts of low-skill agents are negative at all ages, while this is true only after
age 53 for the medium-skilled and after age 64 for the high-skilled.
To compare everyone on the same basis, GPS suggest calculating the
lifetime net tax rates, i.e. the ratio of generational accounts to the present value
of lifetime labour income. This can be done for each educational group. As
Table 2 shows, the lifetime net tax rates of newborns amount to 15.4% for
the low-skilled, 26.8% for the medium-skilled and 32.3% for the high-skilled.
The average lifetime net tax rate then amounts to 32.1% (compared with
28.6% in the GPS study).
Given the changes in the skill composition of these living cohorts, our
average generational accounts per cohort are not identical to those given in
GPS. This is evident in Figure 3. The differences are small for old cohorts but
quite large for young cohorts. Extrapolating the future taxes and transfers of
newborns on the basis of the present profile alone, the classical method
338 ECONOMICA [MAY
TABLE 1
Generational Accounts of Living Generations: Baseline Scenario
(present value in 1995 dollars)
Present value Present Generational

of taxes value of benefits accounts GPS estimates
Less than high school
0 45,552 58,063 12,511 –
20 91,345 114,177 22,832 –
30 93,963 120,576 26,612 –
40 83,769 123,509 39,740 –
50 66,764 127,465 60,701 –
60 41,724 143,701 101,977 –
70 23,742 140,866 117,124 –
100 1,529 14,328 12,798 –
High school
0 77,682 30,974 46,708 –
20 160,019 58,543 101,476 –
30 165,160 63,977 101,183 –
40 151,898 76,054 75,844 –
50 118,288 98,194 20,094 –
60 73,049 139,618 66,568 –
70 41,400 149,275 107,875 –
100 2,049 15,704 13,655 –
More than high school
0 121,860 21,373 100,487 –
20 274,928 40,601 234,327 –
30 309,355 50,327 259,028 –
40 311,983 67,363 244,620 –
50 276,591 98,489 178,102 –
60 194,531 149,011 45,520 –
70 114,091 170,570 56,479 –
100 3,167 18,478 15,311 –
Weighted average
0 100,790 28,140 72,650 64,910
20 208,241 58,235 150,006 149,355
30 230,878 64,238 166,640 159,492
40 235,294 76,415 158,880 135,353
50 186,775 103,095 83,680 65,347
60 109,224 144,138 34,913 39,160
70 57,654 152,966 95,312 95,738
100 1,851 15,156 13,305 13,305
Source: Authors’ calculations.
underestimates newborns’ average account by 10.7% ($64,910 compared with

$72,650).
Burden left for future generations

The total burden left for future generations is directly obtained as the residual
of the government budget constraint. It amounts to $6509 billion in our
TABLE 2
Generational Imbalance and Lifetime Net Tax Rates: Baseline Scenario
(present value in 1995 dollars)
Present value Present value Generational Lifetime net

of taxes of benefits accounts tax ratea
Newborns’ generational account and lifetime tax rate without policy adjustment
oHS 45,552 58,063 12,511 15.4%
HS 77,682 30,974 46,708 26.8%
4HS 121,860 21,373 100,487 32.3%
Restoring the balance through tax adjustment ( þ 1.16%)
oHS 46,080 58,063 11,983 14.7%
HS 78,582 30,974 47,608 27.3%
4HS 123,272 21,373 101,899 32.7%
Restoring the balance through transfer adjustment ( 2.68%)
oHS 45,552 56,504 10,952 13.5%
HS 77,682 30,142 47,540 27.3%
4HS 121,860 20,800 101,061 32.4%
a
Lifetime net tax rate ¼ generational account/discounted lifetime labour income.
250,000
200,000
150,000
100,000
50,000
0
−50,000 0 10 20 30 40 50 60 70 80 90 100
−100,000
GPS average GA
FIGURE 3. Average generational account per living cohort (Baseline scenarioFpresent value in
1995 dollars).
estimates, compared with $9398 billion in the GPS methodology. This is due to
the fact that the GPS methodology underestimates the total payments made by
living generations.
Balancing generational accounts

Examining the sustainability of fiscal policy requires computation of the
present value of payments by future generations under the current policy
(based on the assumptions of Congressional Budget Office about the growth
rate of per capita taxes and transfers). For this purpose, we used our forecasts
of the educational structure of future generations. Despite the remarkable
rise in educational attainment, maintaining the current policy for future
generations generates a present value of payments lower than the total burden
left by living generations. In other words, the current fiscal policy is still
unsustainable.
340 ECONOMICA [MAY
Restoring the balance thus requires either cutting transfers or increasing

taxes. In the classical method of generational accounting, such an adjustment is
implemented by multiplying the net taxes on future generations by a constant
adjustment factor. In our case, with heterogeneous agents, such a rule would
give rise to inconsistent results, since the generational accounts have opposite
signs. For example, multiplying the generational accounts by 1.1 would mean
that individuals with a positive account at birth would pay more in taxes, while
those with a negative account would pay less. Moreover, it seems quite
unrealistic to adjust the accounts of future generations only. As argued by
Haveman (1994), both living and future generations are likely to be affected by
fiscal changes.
For these reasons, we used an adjustment method that affects all the
members of all generations. In a first step, we computed the present value of
payments by future generations under the current fiscal policy. Comparing this
amount with the residual burden given by the budget constraint, we obtained
the gap to be financed by (in the deficit case) or allocated to (in the surplus
case) all living and future generations. In a second step, we computed the
proportional adjustment in all taxes (or transfers) required to balance the
budget. Finally, given the ‘adjusted’ fiscal policy, we derived the new
generational accounts and lifetime net tax rate. Our adjustment calculations
rely on the counterfactual assumption that all changes began in 1995.
Table 2 summarizes our results. Restoring the balance through tax
adjustment produces a rise in all taxes of 1.16%. The lifetime net tax rates then
become 14.7%, 27.3% and 32.7% for the three educational groups.
Restoring the balance through transfer adjustment produces a cut in all
transfers of 2.68%. The lifetime net tax rates are then 13.5%, 27.3% and
32.4%, respectively. These results contrast with those of GPS, who predict that
generational balance requires increasing all taxes by 8.2% or reducing all
benefits by 17.5%. This demonstrates the huge potential impact of the rise in
educational attainment in evaluating the long-run sustainability of fiscal
policies.
IV. DISTRIBUTING EDUCATIONAL EXPENDITURES BY AGE AND SCHOOLING

LEVEL
Following the example of GPS, let us now consider another scenario in which
public education expenditures (about one-fifth of government purchases) are
treated as individual transfers. In our baseline scenario, education spending
evolves at the same pace as the rest of government purchases such as defence or
administration. Although future rises in school attendance will probably be
smaller than in the last fifty years, it could be argued that the growth in
education expenditures will be faster than the growth in the rest of public
spending. Let us then consider an alternative scenario (labelled as ‘Education
benefit’) in which public education expenditure evolves in line with the
demography (i.e. the number of individuals of school age), the educational
composition of successive cohorts (determining the length and the cost of
schooling) and the per capita growth rates taken from the GPS study.
Compared with our baseline assumptions, we expect the differences with the
TABLE 3
Generational Accounts of Living Generations: Education Benefit
Scenario (present value in 1995 dollars)
Present value Present value Generational GPS

of taxes of benefits accounts estimates
Less than high school
0 45,552 101,081 55,529 –
20 91,345 117,060 25,714 –
30 93,963 122,286 28,322 –
40 83,769 124,261 40,492 –
50 66,764 127,653 60,888 –
60 41,724 143,799 102,075 –
70 23,742 140,893 117,151 –
100 1529 14,330 12,801 –
High school
0 77,682 73,246 4436 –
20 160,019 60,986 99,033 –
30 165,160 65,687 99,473 –
40 151,898 76,805 75,092 –
50 118,288 98,381 19,906 –
60 73,049 139,715 66,666 –
70 41,400 149,303 107,902 –
100 2,049 15,707 13,658 –
More than high school
0 121,860 80,451 41,409 –
20 274,928 56,460 218,468 –
30 309,355 52,037 257,318 –
40 311,983 68,115 243,868 –
50 276,591 98,676 177,915 –
60 194,531 149,108 45,423 –
70 114,091 170,598 56,507 –
100 3,167 18,480 15,313 –
Weighted average
0 100,790 80,613 20,177 13,153
20 208,241 67,668 140,573 139,868
30 230,878 65,948 164,930 157,782
40 235,294 77,166 158,128 134,602
50 186,775 103,282 83,493 65,159
60 109,224 144,235 35,011 39,257
70 57,654 152,993 95,339 95,765
100 1851 15,159 13,308 13,308
GPS study to be smaller in this scenario. Table 3 gives the generational

accounts of living generations.
Treating education spending as benefits obviously reduces newborns’
accounts for each level of schooling. The differences with the baseline scenario
amounts to $43,000 for the low-skilled, $42,300 for the medium-skilled and
$59,000 for the high-skilled. These numbers measure the cost of education (in
342 ECONOMICA [MAY
TABLE 4
Generational Imbalance and Lifetime Net Tax Rates: Education Benefit
Scenario (present value in 1995 dollars)
Present value Present value Generational Lifetime net

of taxes of benefits accounts tax ratea
oHS 45,552 101,081 55,529 68.2%
HS 77,682 73,246 4436 2.5%
4HS 121,860 80,451 41,409 13.3%
Restoring the balance through tax adjustment ( þ 1.39%)
oHS 46,187 101,081 54,894 67.5%
HS 78,766 73,246 5519 3.2%
4HS 123,560 80,451 43,109 13.8%
Restoring the balance through transfer adjustment ( 2.38%)
oHS 45,552 98,674 53,122 65.3%
HS 77,682 71,502 6180 3.5%
4HS 121,860 78,535 43,326 13.9%
a
Lifetime net tax rate ¼ generational account/discounted lifetime labour income.
present value at birth). The changes are important for individuals aged 25 and
under. They are minor for older generations for whom mandatory education
belongs to the past. As will be shown in Table 4, the lifetime net tax rates of
newborns become 68.2%, 2.5% and 13.3% for the three educational groups,
respectively.
Once again, our average generational accounts per cohort are not identical
to GPS amounts. The differences are small for old-age cohorts but are larger
for young cohorts. Extrapolating the future taxes and transfers of newborns on
the basis of the contemporary profile, the classical method underestimates
newborns’ average account by about 35%.
In this scenario, the total burden left for future generations amounts to
$2063 billion (instead of $4881 billion as in the GPS methodology). The current
fiscal policy is still unsustainable and generates a long-run budgetary deficit.
The deficit is larger than in the baseline case. Education spending increases
more quickly than in the baseline scenario owing to the changes in the
educational structure of the population. Table 4 shows that restoring the
balance through tax adjustments would necessitate a rise in all taxes by about
1.39% (against 5.0% in the GPS framework). The lifetime net tax rates then
become 67.5%, 3.2% and 13.8% for the three educational groups. Restoring
the balance through transfer adjustments means a cut in all transfers by about
2.38% (against 13.0% in the GPS framework), and lifetime net tax rates
become 65.3%, 3.5% and 13.9%, respectively.
V. SENSITIVITY ANALYSIS
Generational accounts depend on uncertain assumptions about demographic
changes, labour productivity growth rates, budgetary policy, interest rates and
future trends in educational attainment. In this section we analyse the

sensitivity of our calculations to alternative assumptions about the net tax
differential across educational groups, the educational attainment of future
cohorts, and growth and interest rates hypotheses.
Skill premium forecasts

Our baseline results show that, if the structure of taxes and transfers is kept
constant, changes in the skill composition of the population will yield increases
in future tax payments and decreases in future transfer payments. Can these
fiscal gains resist the increasing supply of skills? Is this result robust to possible
changes in the structure of returns to skill? Most of the progress in educational
attainment has occurred in recent decades. Over the last forty years, skill-
biased technical changes have increased the skill premium despite a remarkable
rise in educational attainment. Could this still be the case in the future?
Acemoglu (2002) argues that the rise in educational attainment could push
the skill premium upwards (since an increase in the supply of skills can
stimulate firms to invest in skill-biased technologies); alternatively, educational
increases could generate a slight compression in the wage distribution. A
complete model of the labour market must assess the impact of the supply of
skills on relative wages. Below, we consider a simple scenario in which (i) the
tax profile of medium-skilled workers is kept constant; (ii) the low-skill relative
to medium-skill gap in the tax profile increases by 5%; and (iii) the high-skill
relative to medium-skill gap in the tax profile decreases by 5%. Hence the high-
skill to low-skill gap decreases by 10%. Assuming a larger change would be
inconsistent with our assumption about the schooling decisions of future
cohorts. These changes are introduced progressively and linearly. The total
reduction in wage inequality is obtained in 2050.
The results are presented in Table 5. Low-skill newborns’ generational
account improves by about 10% while high-skill newborns’ account decreases
by 4%. The lifetime net tax rates are quite stable. In terms of generational
imbalance, the deficit increases. Taxes increased by 3.34% (instead of 1.16% in
the baseline scenario) or transfers reduced by 7.68% (instead of 2.68%). These
policy changes are still much smaller than those required by GPS’s results. We
conclude that our findings are quite robust to assumptions about skill premium
forecasts.
The educational level of future cohorts

Let us now examine the sensitivity of our results to assumptions about the
educational attainment of young and future generations. Our baseline scenario
is based on Lee and Miller’s (1997) work. After 2015, we assume that the skill
structure of future cohorts (aged 20 after 2015) will be stationary. For
individuals who have just completed schooling in 1995, the proportions of low-,
medium- and high-skill workers are 13%, 35% and 52%, respectively Lee and
Miller (1997) forecast a slight decrease in educational attainment until 2005
(the proportions becoming 16%, 32% and 52%); then the shares converge
towards 11%, 29% and 60%. These long-run proportions are reached in 2015.
344 ECONOMICA [MAY
TABLE 5
Sensitivity to the Return to Skill ( 10% of the Tax Ratio): Generational
Accounts and Budgetary Adjustments
Newborns’ generational account and lifetime tax rate without policy

adjustment
Generational accounts Lifetime net tax rate
Baseline Lower-skill premium Baseline Lower-skill premium

oHS 12,511 11,224 15.4% 13.3%
HS 46,708 46,708 26.8% 26.8%
4HS 100,487 96,505 32.3% 32.1%
Restoring the generational balance through:

Tax change (in % of the current Transfer change (in % of the current
policy) policy)

1.16% 3.34% 2.68% 7.64%
Newborns’ lifetime tax rate after policy adjustment through:

Tax change Transfer change

oHS 14.7% 11.5% 13.5% 8.1%
HS 27.3% 28.3% 27.3% 28.2%
4HS 32.7% 33.4% 32.4% 32.6%
Compared with the ‘high’ and ‘low’ variants in Cheeseman Day and Bauman
(2000), our baseline scenario can be considered a reasonable middle path.
Two alternative forecasts can be simulated. Cheeseman Day and Bauman’s
(2000) the high projection is based on very optimistic assumptions about future
educational attainment. In the long run, it assumes that the proportions of
high-skilled workers aged 30 will reach 70.2% in 2030 (against 5.2% for low-
skilled workers and 24.6% for medium-skilled). Our ‘low variant’ takes the
most pessimistic annual forecast from Lee and Miller. We keep the 2005
educational structure (16% for the low-skilled, 32% for the medium-skilled
and 52% for the high-skilled) constant after that year.
Table 6 gives the results. Clearly, newborns’ generational accounts and
lifetime net tax rates are quite stable. In terms of generational balance, the low
variant has a substantial impact on the long-run deficit. Taxes would have to
be increased by 5.69% (instead of 1.16% in the baseline scenario) or transfers
reduced by 12.52% (instead of 2.68%). However, the high variant generates a
long-run budgetary surplus. A continued rise in educational attainment would
make the present fiscal policy sustainable: taxes could be reduced by 1.3%
or transfers increased by 3.13%. Of course, reaching the high variant’s
educational attainment would probably require a strongly expansionary
education policy. If the marginal cost of education increases, the discounted
TABLE 6
Sensitivity to the Long-run Educational Structure (High and Low
Variants): Generational Accounts and Budgetary Adjustments
Low Baseline High Low Baseline High

oHS 12,261 12,511 13,820 15.1% 15.4% 17.0%
HS 46,940 46,708 45,728 26.9% 26.8% 26.2%
4HS 100,653 100,487 99,651 32.3% 32.3% 32.0%

Tax change (in % of the current Transfer change (in % of the current
policy) policy)

5.69% 1.16% 1.30% 12.52% 2.68% 3.13%
Newborns’ lifetime tax rate after policy adjustment through:

Tax change Transfer change

oHS 11.9% 14.7% 17.7% 6.2% 13.5% 19.3%
HS 29.5% 27.3% 25.7% 29.1% 27.3% 25.7%
4HS 34.5% 32.7% 31.5% 33.2% 32.4% 31.8%
cost of such a policy could exceed the discounted fiscal gains. In some sense
the baseline scenario seems more realistic, since it is based on current state
commitments. Nevertheless, our sensitivity analysis demonstrates the crucial
role of education policies in the debate on ageing and public finance.
Growth and interest rates

Like GPS, our baseline scenario assumes a 6% real discount rate and a 1.2%
productivity growth rate. This discount rate is roughly equal to the historical
real rate of return on equity. A 1.2% productivity growth rate is a reasonable
value given the past trend of labour productivity. Table 7 gives a range of
alternative projections for an interest rate of 3% (a value closer to the real
return on government bonds) and 9% (a value closer to the return on private
capital), and for labour productivity growth rates varying between 0.7% and
1.7% per year. These alternative scenarios are the same as those used by GPS.
The results must be compared with the baseline scenario in which education
spending is included in government purchases.
It is clear that alternative assumptions about the rate of productivity
growth have only a minor effect on the results. Indeed, the evolution of
individual taxes and benefits up to 2070 relies on the CBO forecasts and is not
much affected by the growth hypotheses. However, alternative assumptions
346 ECONOMICA [MAY
TABLE 7
Sensitivity to Discount and Growth Rate Assumptions: Generational
Accounts and Budgetary Adjustments
oHS g ¼ 0.007 g ¼ 0.012 g ¼ 0.017 g ¼ 0.007 g ¼ 0.012 g ¼ 0.017
i ¼ 0.03 88,290 89,701 91,204 34.4% 35.0% 35.5%

i ¼ 0.06 12,391 12,511 12,638 15.2% 15.4% 15.5%
i ¼ 0.09 1124 1136 1148 3.8% 3.8% 3.9%
HS g ¼ 0.007 g ¼ 0.012 g ¼ 0.017 g ¼ 0.007 g ¼ 0.012 g ¼ 0.017
i ¼ 0.03 88,015 86,535 84,943 17.3% 17.0% 16.7%

i ¼ 0.06 46,840 46,708 46,565 26.9% 26.8% 26.7%
i ¼ 0.09 22,485 22,470 22,453 33.0% 33.0% 33.0%
4HS g ¼ 0.007 g ¼ 0.012 g ¼ 0.017 g ¼ 0.007 g ¼ 0.012 g ¼ 0.017
i ¼ 0.03 278,223 276,415 274,400 27.8% 27.7% 27.5%

i ¼ 0.06 100,677 100,487 100,270 32.3% 32.3% 32.2%
i ¼ 0.09 40,481 40,453 40,419 35.8% 35.8% 35.8%

Tax change (in % of the current Transfer change (in % of the
policy) current policy)
g ¼ 0.007 g ¼ 0.012 g ¼ 0.017 g ¼ 0.007 g ¼ 0.012 g ¼ 0.017
i ¼ 0.03 3.5% 4.0% 4.7% 7.0% 7.8% 9.0%

i ¼ 0.06 1.1% 1.2% 1.2% 2.5% 2.7% 2.9%
i ¼ 0.09 1.0% 1.1% 1.1% 2.6% 2.7% 2.8%
about the interest rate modify the calculations. The lifetime net tax rate of low-
skill individuals is particularly affected by interest rate changes. However,
interest rates and growth rates do not modify the main result: in all cases, the
current fiscal policy is unsustainable. The policy adjustments needed to restore
the generational balance are robust (especially if the interest rate increases).
The tax variation ranges from 1.0% to 4.7% in the two extreme scenarios.
Transfer cuts range from 2.5% to 9.0%.
VI. CONCLUSION
It is usually argued that expected demographic changes threaten the
sustainability of fiscal policies. In most industrialized countries, social policies
involve considerable transfers from young cohorts to old cohorts. If the
number of beneficiaries increases, the financial viability of the system is
obviously called into question. Generational accounting is generally seen as a
meaningful way of evaluating the sustainability of fiscal policy. Recent
calculations on US data reveal a large generational imbalance which, the

authors argue, can be restored only by increasing taxes or cutting transfers.
These studies do not take account of a remarkable change in the
characteristics of people: the rise in educational attainment. This change is
budgetarily important since it greatly modifies the fiscal means and needs of
successive generations. In this paper we have disaggregated tax and benefit age-
profiles by schooling level. This reveals large differences in net taxes among
living generations. Aggregating these net taxes on a whole lifetime basis, we
show that the generational account of low-skill newborns’ is negative
( 15.4% of their lifetime labour income), while medium- and high-skill
newborns have positive accounts (26.8% and 32.3%, respectively, of their
lifetime labour income).
Our results are more optimistic than those of previous studies. Our baseline
scenario indicates that the current fiscal policy (defined by the current level of
taxes and transfers, plus the growth assumptions of per capita taxes and
benefits provided by the CBO) generates a long-run deficit. However, the deficit
is much lower than the GPS predictions. Restoring the generational balance
requires cutting transfers by 2.7% or increasing taxes by 1.2%. These results
are quite robust to our assumptions about future returns to skill, labour
productivity growth and interest rates. Treating education expenditures as
transfers gives similar results. However, the results are sensitive to assumptions
about the educational structure of future cohorts.
Is that a sufficient reason to move from a highly pessimistic position to a
highly optimistic one? The answer to this question depends critically on the
stability of net tax profiles at each level of schooling. We should bear in mind
that generational accounting is a purely mechanical projection tool which
holds these relative differences constant over time. It does not take account of
the interdependencies between demography, or of changes in the educational
structure and the economy. If young generations are more and more highly
educated, the average cost of education per student could be affected. If
unskilled and skilled labour are imperfect substitutes on the labour market, an
increase in the supply of skills could give rise to a drop in the skill premium
(which would be inconsistent with official educational forecasts) and a possible
rise in the fiscal needs of the highly skilled. On the other hand, a rise in the
educational level of the labour force could also stimulate investments in skill-
consuming technical processes and increase the long-run demand for skilled
workers. This would reinforce the role of education in public finance, relative
to our predictions. It is however difficult to forecast the evolution of the skill
premium without a long-run model of the US economy. Integrating
generational accounts and fiscal policies in such a framework is obviously a
promising issue, but one that we must leave for future research.
APPENDIX: THE GA MODEL WITH HETEROGENEOUS AGENTS

The starting point of the generational accounting technique is the government’s
intertemporal budget constraint. At the base year t, the sum of the public net wealth and
the present value of prospective aggregate net payments by living and future generations
must equal the present value of prospective public purchases. This can be expressed as
ðA1Þ PVLt þ PVFt þ NWt ¼ PVGt ;

348 ECONOMICA [MAY
where PVLt is the present value of net tax payments by living generations over the rest
of their lives; PVFt is the present value of net tax payments by future generations; PVGt
is the present value of prospective government purchases of goods and services; and
NWt is the net public wealth.
The net wealth at time t is observed. Two of the remaining terms, PVGt and PVLt,
are projected using current observations and official projections. The fourth term, PVFt,
can thus be calculated as the residual burden bequeathed to future generations.
The present value of government purchases is the discounted sum of public
expenditures,
X
1
Gs
ðA2Þ PVGt ¼ ;
s¼t ð1 þ iÞst
where Gs is the value of public purchases projected at time s X t, and i is the interest rate.
In practice, the path of Gs can be projected partly on the basis of budgetary forecasts
(i.e. between t and tn) and partly using balanced growth assumptions (between tn and
1). In the long run, it is assumed that Gs will grow at the same rate as total factor
productivity, g.
The present value of net tax payments by living generations can be obtained by
summing the present value of the net taxes these generations will pay to the government
over the rest of their lives, i.e. summing the generational accounts of living cohorts. We
distinguish three educational levels (L ¼ low, M ¼ medium and H ¼ high) and assume
that each individual lives a maximum of D years. The present value of payments by
living generations, PVLt, can be written as
D
X
ðA3Þ PVLt ¼ nLj;t pLj;t þ nM M H H
j;t pj;t þ nj;t pj;t ;
j¼0
where pX
j;tis the size of type-X population (X ¼ L, M, H) of age j at time t, and nX
j;t
measures the generational account of these agents.
Generational accounts sum the value of net taxes to be paid by each type of
individual over the rest of his or her life:
D yX
1 X
X
k;tþkj pk;tþkj
ðA4Þ nX
j;t ¼ X
; j ¼ 0; . . . ; D;
pj;t k¼j ð1 þ iÞkj
where yXk;tþkj is the net tax payment by an agent of type X and age k at time t þ k j.
In practice, pX k;tþkj can be projected using demographic forecasts (including
mortality and net immigration flows), data on schooling levels by age, and estimates of
the educational attainment of young living generations when their education is
complete. The net taxes yX k;tþkj can be extrapolated partly on the basis of short-run
forecasts (taking account of official budgetary projections and potential fiscal reforms
between t and tn) and partly using balanced growth assumptions (between tn and 1).
Typically, different assumptions can be considered for the components of yX k;tþkj .
It should be noted that the generational accounts of newborns, measuring the
present value of net taxes they can be expected to pay over their whole lifetimes, need
not all be the same sign. They can be negative for low-skill individuals and positive for
the high-skilled ones. These generational accounts can be expressed as percentages of
X
the average discounted lifetime labour income, denoted by W0;t for a newborn agent of
type X. In GPS’s scheme, this defines the lifetime net tax rate of the newborns as
nX
0;t
ðA5Þ LNRX
0;t ¼ X
:
W0;t
The basic issue in generational accounting is the financial sustainability of public

policies. Given the generational account of newborns at time t ðnX
0;t Þ, will it be possible to
be equally generous to future generations? The present value of net tax payment by
future generations, PVFt, does not, in itself, answer this question. To go further, the
aggregate burden must be transformed into an individual amount, the average account
of future cohorts.
One way to proceed is to compute the hypothetical generational accounts of future
cohorts under current fiscal policy. Using same reasoning as in equations (3) and (4)
above, we can write
min½st1;D
X yLj;s pLj;s
X
1 þ yM M H H
j;sþj pj;s þ yj;sþj pj;s
ðA6Þ PVFtn ¼ ;
s¼tþ1 j¼0 ð1 þ iÞst
where PVFtn is the present value of net payments by future generations if current fiscal
policy is unsustainable.
This hypothetical value can then be compared with the residual value PVFt
computed from equation (1):
if PVFtn ¼ PVFt the policy is sustainable and there is no need to make fiscal
adjustment;
if PVFtn > PVFt the government budget is in surplus and benefits could be increased
without increasing taxes;
if PVFtn < PVFt the current policy is not sustainable or is not generationally balanced:
is implies that either future generations must pay more net tax than current
generations or current policy must be adjusted to restore sustainability.
If the present policy is unsustainable, the obvious strategy is to adjust taxes and/or
transfers at some future date. In this paper we use an adjustment method that covers all
the members of all generations. If a gap has to be financed (to cover a deficit) or a
surplus reallocated, we compute the proportional adjustment in all taxes (or all
transfers) required to balance the budget.5
Let us decompose the net taxes on all generations into two basic components, taxes
and benefits: yX X X
j;s ¼ yT;j;s yB;j;s . A time-invariant adjustment factor can be applied to
each of these components (ZT for taxes and ZB for benefits) so as to restore
sustainability. We then apply these proportional changes to both living generations
(over the rest of their lifetimes) and future generations, so as to balance the budget
constraint. Our adjustment rule is summarized by the following set of equations:
h i
X D X D X yX X X
T;k;tþkj ð1 þ ZT Þ yB;k;tþkj ð1 ZB Þ pk;tþkj
adj
PVLt ¼
j¼0 k¼j X¼L;M;H ð1 þ iÞkj
h i
1 min½st1;D
X X X yXT;j;s ð1 þ ZT Þ y X
B;j;s ð1 Z Þ
B pj;s
X
PVFtadj ¼
s¼tþ1 j¼0 X¼L;M;H ð1 þ iÞst
PVGt ¼ PVLadj adj

t þ PVFt þ NWt :
There is a continuum of pairs (ZT, ZB) restoring the balance. Two specific pairs are
usually considered, one with ZT ¼ 0 if the balance is achieved through cuts in transfers
and one with ZB ¼ 0 if the balance is achieved through tax increases. For each scenario,
the lifetime net rate of tax for future generations can be computed and compared with
that of current newborns.
ACKNOWLEDGMENTS
We thank two anonymous referees, Gilles Duranton, Joël Hellier and Philip Oreopoulos
for very helpful comments. We are grateful to Alan Auerbach, Tim Miller and Philip
Oreopoulos for transmitting their program and dataset. The usual disclaimers apply.
350 ECONOMICA [MAY
NOTES
1. Indeed, it makes little sense to assume that the average net taxes of the generation aged 20 in
1995 will be the same as the average net taxes paid by current older generations.
2. This bias is less important than the previous one, since future changes in educational
attainment are likely to be much smaller than the differences observed among living
generations.
3. These data are available from the website: http://psidonline.isr.umich.edu
4. Taking into account differences in mortality rates would probably make our results slightly
less optimistic. However, as shown in Figure 1, the main differences in generational accounts
are related to differences in taxes (and not to differences in transfers in old age).
5. Our strategy differs slightly from GPS, who compute the changes in taxes and/or benefits
needed to equalize the lifetime net tax rates of current and future generations. It should be
noted that, in line with GPS’s approach, the balance could also be restored through changes
in government purchases.
REFERENCES
ACEMOGLU, D. (2002). Technical change, inequality and the labour market. Journal of Economic
Literature, 40, 7–72.
AUERBACH, A. J., GOKHALE, J. and KOTLIKOFF, L. J. (1991). Generational accounts: a meaningful
alternative to deficit accounting. In D. Bradford (ed.), Tax Policy and the Economy, Vol. 5, pp.
55–110. Cambridge, Mass.: MIT Press.
FFF, FFF and FFF (1994). Generational accounts: a meaningful way to evaluate fiscal
policy. Journal of Economic Perspectives, 8, 73–94.
CHEESEMAN DAY, J. and BAUMAN, K. J. (2000). Have We Reached the Top? Educational
Attainment Projections of the US Population. Population Division Working Paper, no. 43, US
Census Bureau.
CONGRESSIONAL BUDGET OFFICE (CBO) (1997a). An Economic Model for Long-run Budget
Simulations. Washington: CBO, July.
FFF (1997b). The Economic and Budgetary Outlook: An Update. Washington: US Government
Printing Office, September.
GOKHALE, J., PAGE, B. R. and STURROCK, J. R. (1999). Generational accounts for the United
States: an update. In A. J. Auerbach, L. J. Kotlikoff and W. Leibfritz (eds.), Generational
Accounting Around the World. NBER Books, Chicago: University of Chicago Press.
HAVEMAN, R. (1994). Should generational accounts replace public budgets and deficits? Journal of
Economic Perspectives, 8, 95–111.
KOTLIKOFF, L. G. (1992). Generational Accounting: Knowing Who Pays, and When, for What We
Spend. New York: Free Press.
LEE, R. D. and MILLER, T. (1997). Immigrants and their descendants. Project on the Economic
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Fiscal Policy and Educational Attainment in The United States: A Generational Accounting Perspective

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Fiscal Policy and Educational Attainment in The United States: A Generational Accounting Perspective

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Economica (2007) 74, 329–350

Fiscal Policy and Educational Attainment in the

Final version received 15 December 2005.

In this paper we investigate the consequences of the rise in educational attainment on US

generations, i.e. the rise in educational attainment of successive cohorts.

All these disaggregated proﬁles were then calibrated so as to be consistent

Hence it is indisputable that changes in the educational structure will strongly

II. METHODOLOGY AND ASSUMPTIONS

The present value of payments by living generations (PVL)

Population forecasts Our baseline scenario uses the intermediate population

Educational attainment We used data on the skill composition of living US

FIGURE 2(a). Population shares by educational attainment (% of the total population).

changes in educational attainment (as measured by the share of each

older Americans in 2050 is assumed to be equal to the work effort of educated

Balancing the budget constraint

III. BASELINE RESULTS

Present value Present Generational

Source: Authors’ calculations.

underestimates newborns’ average account by 10.7% ($64,910 compared with

Burden left for future generations

Present value Present value Generational Lifetime net

Balancing generational accounts

Restoring the balance thus requires either cutting transfers or increasing

IV. DISTRIBUTING EDUCATIONAL EXPENDITURES BY AGE AND SCHOOLING

Present value Present value Generational GPS

Source: Authors’ calculations.

GPS study to be smaller in this scenario. Table 3 gives the generational

Present value Present value Generational Lifetime net

future trends in educational attainment. In this section we analyse the

Skill premium forecasts

The educational level of future cohorts

Newborns’ generational account and lifetime tax rate without policy

Baseline Lower-skill premium Baseline Lower-skill premium

Restoring the generational balance through:

Baseline Lower-skill premium Baseline Lower-skill premium

Newborns’ lifetime tax rate after policy adjustment through:

Baseline Lower-skill premium Baseline Lower-skill premium

Source: Authors’ calculations.

Low Baseline High Low Baseline High

Restoring the generational balance through:

Low Baseline High Low Baseline High

Newborns’ lifetime tax rate after policy adjustment through:

Low Baseline High Low Baseline High

Source: Authors’ calculations.

Growth and interest rates

i ¼ 0.03 88,290 89,701 91,204 34.4% 35.0% 35.5%

HS g ¼ 0.007 g ¼ 0.012 g ¼ 0.017 g ¼ 0.007 g ¼ 0.012 g ¼ 0.017

i ¼ 0.03 88,015 86,535 84,943 17.3% 17.0% 16.7%

4HS g ¼ 0.007 g ¼ 0.012 g ¼ 0.017 g ¼ 0.007 g ¼ 0.012 g ¼ 0.017

i ¼ 0.03 278,223 276,415 274,400 27.8% 27.7% 27.5%

Restoring the generational balance through:

i ¼ 0.03 3.5% 4.0% 4.7% 7.0% 7.8% 9.0%

Source: Authors’ calculations.

calculations on US data reveal a large generational imbalance which, the

APPENDIX: THE GA MODEL WITH HETEROGENEOUS AGENTS

r The London School of Economics and Political Science 2006

The basic issue in generational accounting is the ﬁnancial sustainability of public

PVGt ¼ PVLadj adj

r The London School of Economics and Political Science 2006

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