[Analytical Perspectives]
[Economic and Accounting Analyses]
[2. Stewardship: Toward a Federal Balance Sheet]
[From the U.S. Government Publishing Office, www.gpo.gov]


 
             2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

                               Introduction

  The Government's financial condition can only be properly evaluated 
using a broad range of data--more than would usually be shown on a 
business balance sheet--and several complementary perspectives. This 
chapter presents a framework for such analysis. No single table in the 
chapter is the equivalent of a Federal balance sheet, but taken as a 
whole, the chapter provides an overview of the Government's resources, 
the current and future claims on them, and some idea of what the 
taxpayer gets in exchange for these resources. This is the kind of 
assessment for which a financial analyst would turn to a business 
balance sheet, modified to take into account the Government's unique 
roles and circumstances.
  Because there are important differences between Government and 
business, and because there are serious limitations on the available 
data, this chapter's findings should be interpreted with caution; its 
conclusions are tentative and subject to future revision.
  The presentation consists of three parts:
     Part I reports on what the Federal Government owns and what 
          it owes. Table 2-1 summarizes this information. The assets and 
          liabilities in this table are a useful starting point for 
          analysis, but they are only a partial reflection of the full 
          range of Government resources and responsibilities. Only those 
          items actually owned by the Government are included in the 
          table, but the Government is able to draw on other resources. 
          It can tax and use other measures to meet future obligations. 
          The liabilities shown in the table include the binding 
          commitments that have resulted from prior Government action, 
          but the Government's responsibilities are much broader than 
          this.
     Part II presents possible paths for the Federal budget that 
          extend beyond the ten-year budget window. Table 2-2 summarizes 
          this information. This part is intended to show the 
          Government's long-run financial burdens and the resources that 
          it will have available to meet them. Some future claims on the 
          Government deserve special emphasis because of their 
          importance to individuals' retirement plans. Table 2-3 
          summarizes the condition of the Social Security and Medicare 
          trust funds and how that condition changed between 1999 and 
          2001.
     Part III features information on economic and social 
          conditions which the Government affects by its actions. Table 
          2-4 presents summary data for national wealth, while 
          highlighting the Federal investments that have contributed to 
          that wealth. Table 2-5 presents a small sample of economic and 
          social indicators.

                    Relationship with FASAB Objectives

  The framework presented here meets the stewardship objective \1\ for 
Federal financial reporting recommended by the Federal Accounting 
Standards Advisory Board and adopted for use by the Federal Government 
in September 1993.
---------------------------------------------------------------------------
  \1\ Objectives of Federal Financial Reporting, Statement of Federal 
Financial Accounting Concepts Number 1, September 2, 1993. The other 
objectives are budgetary integrity, operating performance, and systems 
and controls.
---------------------------------------------------------------------------
           Federal financial reporting should assist report users in 
     assessing the impact on the country of the Government's operations 
          and investments for the period and how, as a result, the 
    Government's and the Nation's financial conditions have changed and 
    may change in the future. Federal financial reporting should provide 
               information that helps the reader to determine:

          3a. Whether the Government's financial position improved or 
                        deteriorated over the period.

       3b. Whether future budgetary resources will likely be sufficient 
    to sustain public services and to meet obligations as they come due.

           3c. Whether Government operations have contributed to the 
                   Nation's current and future well-being.

  The presentation here explores an experimental approach for meeting 
this objective at the Government-wide level.

            What Can Be Learned from a Balance Sheet Approach

  The budget is an essential tool for allocating resources within the 
Federal Government and between the public and private sectors; but the 
standard budget presentation, with its focus on annual outlays, 
receipts, and the surplus/deficit, does not provide all the information 
needed for a full analysis of the Government's financial and investment 
decisions. A business is ultimately judged by the bottom line in its 
balance sheet, but for the national Government, the ultimate test is how 
its actions affect the country.

[[Page 12]]

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     QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''
------------------------------------------------------------------------
1.   According to Table 2-1, the Government's liabilities exceed its
 assets. No business could operate in such a fashion. Why does the
 Government not manage its finances more like a business?

               The Federal Government has fundamentally different
                objectives from a business enterprise. The primary goal
                of every business is to earn a profit, and the Federal
                Government leaves almost all activities at which a
                profit could be earned to the private sector. For the
                vast bulk of the Federal Government's operations, it
                would be difficult or impossible to charge prices--let
                alone prices that would cover expenses. The Government
                undertakes these activities not to improve its balance
                sheet, but to benefit the Nation--to foster not only
                monetary but also nonmonetary values.

               For example, the Federal Government invests in education
                and research. The Government earns no direct return from
                these investments; but the Nation and its people are
                made richer if they are done successfully. The return on
                these investments shows up not as an increase in
                Government assets, but as an increase in the general
                state of knowledge and in the earning capacity of the
                country's citizens. A business's motives for investment
                are quite different; business invests to earn a profit
                for itself, not others, and if its investments are
                successful, their value will be reflected in its balance
                sheet. Because the Federal Government's objectives are
                different, its balance sheet behaves differently, and
                should be interpreted differently.

2.   Table 2-1 seems to imply that the Government is insolvent. Is it?

               No. Just as the Federal Government's responsibilities are
                of a different nature than those of a private business,
                so are its resources. Government solvency must be
                evaluated in different terms.

               What the table shows is that those Federal obligations
                that are most comparable to the liabilities of a
                business corporation exceed the estimated value of the
                assets the Federal Government actually owns. However,
                the Government has access to other resources through its
                sovereign powers. These powers, which include taxation,
                allow the Government to meet its present obligations and
                those that are anticipated from future operations even
                though the Government's assets are less than its
                liabilities.

               The financial markets clearly recognize this reality. The
                Federal Government's implicit credit rating is the best
                in the United States; lenders are willing to lend it
                money at interest rates substantially below those
                charged to private borrowers. This would not be true if
                the Government were really insolvent or likely to become
                so. Where governments totter on the brink of insolvency,
                lenders are either unwilling to lend them money, or do
                so only in return for a substantial interest premium.

               In recent years, the Government's net liabilities have
                leveled off and begun to shrink. By achieving a budget
                surplus, the Government has been able to repay some of
                its debts and reduce the balance between its liabilities
                and its assets.

3.   Why does the Government not keep a proper set of books?

               The Government is not a business, and accounting
                standards designed to illuminate how much a business
                earns and how much equity it has could provide
                misleading information if applied to the Government. In
                recent years, the Federal Accounting Standards Advisory
                Board (FASAB) has developed, and the Government has
                adopted, a conceptual accounting framework that reflects
                the Government's distinct functions and answers the
                questions for which Government should be accountable.
                This framework addresses budgetary integrity, operating
                performance, stewardship, and systems and controls. The
                Board has also developed, and the Government has
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[[Page 13]]

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
                                Continued
------------------------------------------------------------------------

               adopted, a full set of accounting standards. Federal

               This chapter is intended to address the ``stewardship
                objective''--assessing the interrelated condition of the
                Federal Government and the Nation. The data in this
                chapter illuminate the trade-offs and connections
                between making the Federal Government ``better off'' and
                making the Nation ``better off.'' The Government does
                not have a ``bottom line'' comparable to the net worth
                of a business corporation, and some analysts have found
                the absence of a bottom line to be frustrating. But it
                would not help to pretend that such a number exists when
                clearly it does not.

4.   Why is Social Security not shown as a liability in Table 2-1?

               Future Social Security benefits are a political and moral
                responsibility of the Federal Government, but these
                benefits are not a liability in the usual sense. The
                Government has unilaterally decreased as well as
                increased Social Security benefits in the past, and
                future reforms could alter them again. When the amount
                in question can be changed unilaterally, it is not
                ordinarily considered a liability.

               Other Federal programs exist that are similar to Social
                Security in the promises they make--Medicare, Medicaid,
                Veterans pensions, and Food Stamps--to name a few. Yet
                few would consider the future benefits expected under
                these programs to be Federal liabilities. It would be
                difficult, however, to justify a different accounting
                treatment for them, if Social Security were to be
                classified as a liability. There is no bright line
                dividing Social Security from other programs that
                promise benefits to people, and all such programs should
                be accounted for similarly.

               Furthermore, if future Social Security benefits were to
                be treated as liabilities, logic would suggest that
                future payroll tax receipts that are earmarked to
                finance those benefits ought to be considered assets.
                Other tax receipts, however, are not counted as assets
                for good reasons, and drawing a line between Social
                Security taxes and other taxes would be questionable.

               Under Generally Accepted Accounting Principles, Social
                Security is not considered to be a liability, so
                omitting it from Table 2-1 is consistent with the
                accounting standards developed for the Federal
                Government by the Federal Accounting Standards Advisory
                Board (FASAB).

5.   It is all very well to run a budget surplus now, but can it be
 sustained? When the baby-boom generation retires, will the deficit not
 return even larger than ever before?

               The aging of the U.S. population will become dramatically
                evident when the baby-boomers begin to retire in less
                than ten years. This demographic transition poses
                serious long-term problems for the Federal budget and
                its major entitlement programs. The current budget
                surplus, however, will help the country address these
                problems. The surplus means that there will be a
                significant decline in Federal net interest payments
                over the next several years. This is one key step
                towards keeping the budget in balance when the baby-
                boomers retire.

               The second part of this chapter describes how the budget
                is likely to evolve under various possible alternative
                scenarios.
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[[Page 14]]

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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
                                Continued
------------------------------------------------------------------------

6.   Would it be sensible for the Government to borrow to finance needed

               The Government consumes capital each year in the process
                of providing goods and services to the public. If the
                Government financed new capital by borrowing, it should
                also plan to pay off this debt as the capital was used
                up. As discussed in Chapter 6 of Analytical
                Perspectives, net investment in physical capital owned
                by the Federal Government has often been negative
                recently, so little if any deficit spending would
                actually have been justified recently by this borrowing-
                for-investment criterion.

               The Federal Government also funds substantial amounts of
                physical capital that it does not own, such as highways
                and research facilities, and it funds investment in
                intangible ``capital'' such as education and training
                and the conduct of research and development. A private
                business would never borrow to spend on assets that
                would be owned by someone else. However, such spending
                is a principal function of Government. It is not clear
                whether this type of capital investment would fall under
                the borrowing-for-investment criterion. Certainly, these
                investments do not create Federally owned assets, even
                though they are part of national wealth.

               There is another difficulty with the logic of borrowing
                to invest. Businesses expect investments to earn a
                return large enough to cover their cost. In contrast,
                the Federal Government does not generally expect to
                receive a direct payoff from its investments, whether or
                not it owns them. In this sense, Government investments
                are no different from other Government expenditures, and
                the fact that they provide services over a longer period
                is no justification for excluding them when calculating
                the surplus/deficit.

               Finally, the Federal Government must pursue policies that
                support the overall financial and economic well-being of
                the Nation. The Government may deem it desirable to run
                a budget surplus, even if this means paying for its own
                investments from current revenues, instead of borrowing.
                Considerations in addition to the size of Federal
                investment must be weighed in choosing the right level
                of the surplus.

7.   Is it appropriate to include the Social Security surplus when
 measuring the Government's consolidated budget surplus?

               The Federal budget has many purposes. It should not be
                surprising that, with more than one purpose, the budget
                is presented in more than one way. None of these
                measures is always right, or always wrong; it depends
                upon the purpose to which the budget is put.

               For the purpose of measuring the Government's effects on
                the economy, it would be misleading to omit Social
                Security or any other part of the budget, as all parts
                of the budget affect the economy. For purposes of fiscal
                discipline, leaving out particular Government activities
                could actually be dangerous. The principle of a
                ``unified'' all-inclusive budget has been used to
                forestall the practice of moving favored programs off-
                budget--which has been done to shield those programs
                from scrutiny and funding discipline.

               For setting fiscal policy, however, an alternative to the
                unified budget is useful. In particular, the Congress
                has moved Social Security off-budget. The purpose of
                doing so was to stress the need to provide independent,
                sustainable funding for Social Security in the long
                term; and to show the extent to which the rest of the
                budget had relied on annual Social Security surpluses to
                make up for its own shortfall.
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[[Page 15]]


  The data needed to judge its performance go beyond a simple measure of 
net assets. Consider, for example, Federal investments in education or 
infrastructure whose returns flow mainly to the private sector and which 
are often owned by households, private businesses or State and local 
governments. From the standpoint of the Federal Government's ``bottom 
line,'' these investments might appear to be unnecessary or even 
wasteful; but they make a real contribution to the economy and to 
people's lives. A framework for evaluating Federal finances needs to 
take Federal investments into account, even when the return they earn 
does not accrue to the Federal Government.
  A good starting point for analysis is Table 2-1, which shows the 
Government's assets and liabilities. This illustrative tabulation of net 
liabilities is based on data from a variety of public and private 
sources. It has sometimes been suggested that the Federal Government's 
assets, if fully accounted for, would exceed its debts. Table 2-1 
clearly shows that this is not correct. For many years, Government debts 
increased far more than did Government assets, although in recent years, 
Government budget surpluses have allowed the Government to reduce its 
debt and thereby lower its net liabilities.
  Table 2-1 presents the Government's binding obligations--such as 
Treasury debt and the present discounted value of the pensions owed to 
Federal employees as deferred compensation. These obligations have 
counterparts in the business world, and would appear on a business 
balance sheet. Accrued obligations for Government insurance policies and 
the estimated present value of failed loan guarantees and deposit 
insurance claims are also analogous to private liabilities, and are 
included with the other Government liabilities. These obligations form 
only a subset of the Government's financial responsibilities.
  The Federal Government also has resources that go beyond the assets 
that would normally appear on a balance sheet. These include the 
Government's sovereign powers to tax, regulate commerce, and set 
monetary policy. The best way to analyze how the Government uses these 
powers is to make a long-run projection of the Federal budget (as is 
done in Part II of this chapter). The budget provides a comprehensive 
measure of the Government's annual cash flows. Projecting it forward 
shows how the Government is expected to use its powers to generate cash 
flows in the future.
  The Government has established a broad range of programs that dispense 
cash and other benefits to individual recipients. The Government is not 
constitutionally obligated to continue payments under these programs; 
the benefits can be modified or even ended at any time, subject to the 
decisions of Congress. Such changes are a regular part of the 
legislative cycle. It is likely, however, that many of these programs 
will remain Federal responsibilities in some form for the foreseeable 
future.
  The numbers in the budget are silent on the issue of whether the 
public is receiving value for its tax dollars. Information on that point 
requires performance measures for Government programs supplemented by 
appropriate information about conditions in the economy and society. 
Some such data are currently available, but more measures need to be 
developed to obtain a full picture. Examples of what might be done are 
discussed below.
  The presentation that follows consists of a series of tables and 
charts. Taken together, they are the functional equivalent of a business 
balance sheet. The schematic diagram, Chart 2-1, shows how they fit 
together. The tables and charts should be viewed as an ensemble, the 
main elements of which are grouped in two broad categories--assets/
resources and liabilities/responsibilities.

[[Page 16]]



     Reading down the left-hand side of Chart 2-1 shows the 
          range of Federal resources, including assets the Government 
          owns, tax receipts it can expect to collect, and national 
          wealth that provides the base for Government revenues.
     Reading down the right-hand side reveals the full range of 
          Federal obligations and responsibilities, beginning with 
          Government's acknowledged liabilities based on past actions, 
          such as the debt held by the public, and going on to include 
          future budget outlays. This column ends with a set of 
          indicators highlighting areas where Government activity 
          affects society or the economy.

[[Page 17]]

         PART I--THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES

  Table 2-1 summarizes what the Government owes as a result of its past 
operations netted against the value of what it owns for a number of 
years beginning in 1960. Assets and liabilities are measured in terms of 
constant FY 2000 dollars. Ever since 1960, Government liabilities have 
exceeded the value of assets (see chart 2-2). In the late 1970s, a 
speculative run-up in the prices of oil, gold, and other real assets 
temporarily boosted the value of Federal holdings, but subsequently 
those prices declined. \2\ Currently, the total real value of Federal 
assets is estimated to be about 27 percent greater than it was in 1960. 
Meanwhile, Federal liabilities have increased by 162 percent in real 
terms. The decline in the Federal net asset position was principally due 
to persistent Federal budget deficits and the relatively slow increase 
in Federal asset holdings.
---------------------------------------------------------------------------
  \2\ This temporary improvement highlights the importance of the other 
tables in this presentation. What is good for the Federal Government as 
an asset holder is not necessarily favorable to the economy. The decline 
in inflation in the early 1980s reversed the speculative run-up in gold 
and other commodity prices. This reduced the balance of Federal net 
assets, but it was good for the economy and the Nation as a whole.
---------------------------------------------------------------------------
  Since the mid-1990s, the shift from budget deficits to budget 
surpluses has sharply reduced Federal net liabilities. Last year rising 
energy prices and increased land values also contributed to a rise in 
the real value of Federal assets, which pulled down net liabilities even 
further. Currently, the net excess of liabilities over assets is about 
$3.2 trillion, or $11,500 per capita, com

                                                     Table 2-1.  GOVERNMENT ASSETS AND LIABILITIES *
                                             (As of the end of the fiscal year, in billions of 2000 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    1960     1965     1970     1975     1980     1985     1990      1995      1998      1999      2000
--------------------------------------------------------------------------------------------------------------------------------------------------------

                     ASSETS

Financial Assets:
   Cash and Checking Deposits...................       42       61       38       30       46       30        41        42        49        64        56
   Other Monetary Assets........................        1        1        1        1        2        2         2         1         4         5         6
   Mortgages....................................       27       26       39       40       74       76        97        67        47        80        77
   Other Loans..................................      100      137      172      171      218      288       204       159       178       187       189
     less Expected Loan Losses..................       -1       -3       -4       -9      -17      -17       -19       -24       -47       -51       -37
   Other Treasury Financial Assets..............       43       55       24       31       39       39        97       151       131       140       144
                                                 -------------------------------------------------------------------------------------------------------
     Total......................................      212      277      269      265      362      419       422       397       361       425       435

Nonfinancial Assets:
   Fixed Reproducible Capital...................      996      997    1,040      944      912    1,056     1,110      1106       999       980       974
     Defense....................................      865      822      830      691      633      760       795       768       664       642       624
     Nondefense.................................      131      175      210      253      279      296       315       338       335       338       350
   Inventories..................................      263      228      212      189      232      267       236       167       139       138       135
   Nonreproducible Capital......................      424      435      417      614      979    1,061       835       622       695       731       922
     Land.......................................       92      128      161      253      321      338       346       258       333       360       399
     Mineral Rights.............................      332      308      256      361      658      724       489       364       362       370       523
                                                 -------------------------------------------------------------------------------------------------------
       Subtotal.................................    1,683    1,660    1,669    1,747    2,122    2,385     2,180     1,895     1,833     1,849     2,031
                                                 =======================================================================================================
      Total Assets..............................    1,895    1,937    1,937    2,012    2,485    2,804     2,602     2,291     2,193     2,274     2,466

                   LIABILITIES

Financial Liabilities:
   Debt held by the Public......................    1,124    1,159    1,048    1,061    1,306    2,174     2,965     3,930     3,862     3,715     3,410
   Trade Payables and Miscellaneous.............       15       21       23       31       55       82       117        90        75        73        73
                                                 -------------------------------------------------------------------------------------------------------
     Subtotal...................................    1,139    1,180    1,070    1,092    1,361    2,255     3,082     4,021     3,937     3,788     3,484

Insurance Liabilities:
   Deposit Insurance............................        0        0        0        0        2        9        72         5         2         1         1
   Pension Benefit Guarantee \1\................        0        0        0       43       31       43        43        21        49        41        40
   Loan Guarantees..............................        0        0        2        6       12       11        16        29        35        35        37
   Other Insurance..............................       31       28       22       20       27       17        20        17        16        16        16
                                                 -------------------------------------------------------------------------------------------------------
     Subtotal...................................       31       28       24       70       73       80       150        72       102        95        95

Federal Pension and Retiree Health Liabilities:
   Pension Liabilities..........................      794    1,006    1,196    1,360    1,792    1,793     1,746     1,689     1,664     1,688     1,684
   Retiree Health Insurance Benefits............      190      241      287      326      430      430       419       405       376       376       384
                                                      Total......................................      984    1,248    1,483    1,685    2,222    2,223     2,165     2,093     2,039     2,064     2,068
                                                 =======================================================================================================
Total Liabilities...............................    2,154    2,456    2,578    2,847    3,655    4,559     5,398     6,187     6,079     5,947     5,646

Balance.........................................     -259     -519     -641     -835   -1,171   -1,755    -2,796    -3,895    -3,885    -3,673    -3,180
-------------------------------------------------------------------------------------------------------
Addenda:........................................

Balance Per Capita (in 2000 dollars)............   -1,433   -2,670   -3,124   -3,867   -5,127   -7,338   -11,152   -14,771   -14,326   -13,422   -11,520

Ratio to GDP (in percent).......................    -10.1    -16.0    -16.6    -19.0    -22.3    -28.2     -38.9     -47.7     -42.0     -38.0     -31.6
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* This table shows assets and liabilities for the Government as a whole excluding the Federal Reserve System.

\1\ The model and data used to calculate this liability were revised for 1996-1999.

[[Page 18]]

pared with net liabilities of $3.9 trillion (FY 2000 dollars) and 
$14,800 per capita (FY 2000 dollars) in 1995.

Assets

  The assets in Table 2-1 are a comprehensive list of the financial and 
physical resources owned by the Federal Government.
  Financial Assets: According to the Federal Reserve Board's Flow-of-
Funds accounts, the Federal Government's holdings of financial assets 
amounted to $0.4 trillion at the end of FY 2000. Government-held 
mortgages and other loans (measured in constant dollars) reached a peak 
in the mid-1980s. Since then, the value of Federal loans has declined. 
Holdings of mortgages rose sharply in the late 1980s and then declined 
in the 1990s, as the Government acquired mortgages from failed savings 
and loan institutions and then liquidated them.
  The face value of mortgages and other loans overstates their economic 
worth. OMB estimates that the discounted present value of future losses 
and interest subsidies on these loans is about $40 billion as of 2000. 
These estimated losses are subtracted from the face value of outstanding 
loans to obtain a better estimate of their economic worth.
  Reproducible Capital: The Federal Government is a major investor in 
physical capital and computer software. Government-owned stocks of such 
capital amounted to about $1.0 trillion in 2000 (OMB estimate). About 
two-thirds of this capital took the form of defense equipment or 
structures.
  Non-reproducible Capital: The Government owns significant amounts of 
land and mineral deposits. There are no official estimates of the market 
value of these holdings (and of course, in a realistic sense, much of 
these resources could or would never be sold). Researchers in the 
private sector have estimated what they are worth, and these estimates 
are extrapolated in Table 2-1. Private land values fell sharply in the 
early 1990s, but they have risen since 1993. It is assumed here that 
Federal land shared in the decline and the subsequent recovery. Oil 
prices declined in 1997-1998 but rebounded sharply in 1999-2000 causing 
the estimated value of Federal mineral deposits to fluctuate. (The 
estimates omit other types of valuable assets owned by the Government, 
such as works of art and historical artefacts, because the valuation of 
many of these assets would have little realistic basis, and because, as 
part of the Nation's historical heritage, most of these objects would 
never be sold.)
  Total Assets: The total real value of Government assets is lower now 
than at the end of the 1980s, mainly because of declines in defense 
capital, although Government asset values have risen strongly since 
1998. Even so, the Government's holdings are vast. At the end of 2000, 
the value of Government assets is estimated to have been about $2.5 
trillion.

Liabilities

  Table 2-1 covers all those liabilities that would also appear on a 
business balance sheet and only those liabilities. These include various 
forms of Federal debt, Federal pension and health insurance obligations 
to civilian and military retirees, and the estimated liability arising 
from Federal insurance and loan guarantee programs.
  Financial Liabilities: Financial liabilities amounted to about $3.5 
trillion at the end of 2000. The single largest component was Federal 
debt held by the public, amounting to around $3.4 trillion. In addition 
to debt held by the public, the Government's financial liabilities 
include approximately $0.1 trillion in miscellaneous liabilities.
  Guarantees and Insurance Liabilities: The Federal Government has 
contingent liabilities arising from loan guarantees and insurance 
programs. When the Government guarantees a loan or offers insurance, 
cash disbursements may initially be small or, if a fee is charged, the 
Government may even collect money; but the risk of future cash payments 
associated with such commitments can be large. The figures reported in 
Table 2-1 are estimates of the current discounted value of prospective 
future losses on outstanding guarantees and insurance contracts. The 
present value of all such losses taken together is less than $0.1 
trillion. The resolution of the many failures in the savings and loan 
and banking industries has helped to reduce the liabilities in this 
category by about half since 1990.
  Federal Pension and Retiree Health Liabilities: The Federal Government 
owes pension benefits as a form of deferred compensation to retired 
workers and to current employees who will eventually retire. It also 
provides its retirees with subsidized health insurance through the 
Federal Employees Health Benefits program. The amount of these 
liabilities is large. The discounted present value of the benefits is 
estimated to have been around $2.1 trillion at the end of FY 2000. \3\
---------------------------------------------------------------------------
  \3\ The pension liability is the actuarial present value of benefits 
accrued-to-date based on past and projected salaries. The 2000 liability 
is extrapolated from recent trends. The retiree health insurance 
liability is based on actuarial calculations of the present value of 
costs for existing programs. It has only been estimated on a consistent 
basis since 1997. For earlier years the liability was assumed to grow in 
line with the pension liability, which may differ significantly from 
what the actuaries would calculate for this period.
---------------------------------------------------------------------------

The Balance of Net Liabilities

  Because of its sovereign powers, the Government need not maintain a 
positive balance of net assets; the buildup in net liabilities since 
1960 did not damage Federal creditworthiness. By 1995 net liabilities 
had reached 48 percent of GDP. Since then, the net balance as a 
percentage of GDP has fallen for five straight years. The real value--
adjusted for inflation--of net liabilities has also fallen by $0.7 
trillion (FY 2000 dollars), reflecting the shift from budget deficits to 
surpluses, and a recent recovery in some Federal asset prices. If the 
budget surplus is maintained, as projected in the President's Budget, 
the net balance will continue to improve.


[[Page 19]]



         PART II--THE BALANCE OF RESOURCES AND RESPONSIBILITIES

  This part of the presentation describes long-run projections of the 
Federal budget that extend beyond the normal 5 to 10 year budget 
horizon. Forecasting the economy and the budget over such a long period 
is highly uncertain. Future budget outcomes depend on a host of 
unknowns--constantly changing economic conditions, unforeseen 
international developments, unexpected demographic shifts, the 
unpredictable forces of technological advance, and evolving political 
preferences. Those uncertainties increase the further into the future 
the projections are pushed. Long-run budget projections can be useful, 
however, in sounding warnings about future problems. Federal 
responsibilities extend well beyond the next decade. There is no time 
limit on the Government's constitutional responsibilities, and programs 
like Social Security are intended to continue indefinitely.

  The Threat to the Budget from the Impending Demographic Transition: It 
is evident even now that there will be mounting challenges to the budget 
early in this century. In 2008, the first of the huge baby-boom 
generation born after World War II will reach age 62 and become eligible 
for early retirement under Social Security. In the years that follow, 
there will be serious strains on the budget because of increased 
expenditures for Social Security and for the Government's health 
programs which serve the elderly--Medicare and increasingly Medicaid. 
Long-range projections can help define how serious these strains might 
become, and what would be needed to withstand them.
  The U.S. population has been aging for decades, but the impending 
demographic shift is now just over the horizon. The baby-boom cohort has 
moved into its prime earning years, while the much smaller cohort born 
during the Great Depression has been retiring. Together these shifts in 
the population have held down the rate of growth in the number of 
retirees relative to the labor force. The suppressed budgetary pressures 
are likely to burst forth when the baby-boomers begin to retire at the 
end of this decade.
  The pressures are expected to persist even after the baby-boomers are 
no longer here. The Social Security actuaries project that the ratio of 
workers to Social Security beneficiaries will fall from around 3\1/2\ 
currently to around 2 as the baby-boomers retire, and because of lower 
fertility and improved mortality, that ratio is not expected to rise 
again. With fewer workers to pay taxes that support the retired 
population, the budgetary pressures on the Federal retirement pro

[[Page 20]]

grams will persist. The problem posed by the demographic transition is a 
permanent one.
  Another way to see the problem is to examine the projected spending on 
Social Security, Medicare, and Medicaid. Currently, these programs 
account for 46 percent of non-interest Federal spending; up from 30 
percent in 1980. By 2040, when most of the remaining baby-boomers will 
be in their 80s, these three programs could easily account for more than 
two-thirds of non-interest Federal spending. At the end of the 
projection period, the figure rises to over 75 percent of non-interest 
spending. In other words, under an extension of current budget policy, 
almost all of the budget would go to these three programs alone. That 
would considerably reduce the flexibility of the budget, and the 
Government's ability to respond to new challenges.
  Measured relative to the size of the economy, the three major 
entitlement programs now amount to 7 percent of GDP. \4\ By 2040, this 
share doubles to 14 percent, and in 2075 it is projected to reach 18 
percent of GDP. Current projections suggest, absent structural changes 
in the programs, that the Federal Government will eventually have to 
find 11 percent of GDP to cover future benefits.
---------------------------------------------------------------------------
  \4\ Over long periods when the rate of inflation is positive, 
comparisons of dollar values are meaningless. Even the low rate of 
inflation assumed in this budget will reduce the value of a 2000 dollar 
by almost 50 percent by 2030, and by 65 percent by 2050. For long-run 
comparisons, it is much more useful to examine the ratio of the surplus/
deficit and other budget totals to the expected size of the economy as 
measured by GDP.
---------------------------------------------------------------------------

  The Shortfall in Social Security: Social Security is intended to be 
self-financing. Workers and employers pay taxes earmarked for the Social 
Security trust funds, and the funds disburse benefits. In recent years, 
the funds have been increasing in size as a result of a growing Social 
Security surplus. At the end of FY 2000, the combined Old Age, Survivors 
and Disability Insurance (OASDI) trust funds had reached $1 trillion. 
The demographic transition, however, is expected to reverse the buildup 
of the trust funds under current law. The program's actuaries project 
that by 2016, taxes flowing into the funds will fall short of program 
benefits and expenses. \5\ The funds are projected to continue to grow 
for some years beyond this point because of positive interest income, 
but by 2025, the trust funds will peak and begin to be drawn down; by 
2038, when the youngest baby-boomers will be in their 70s, the actuaries 
project that the OASDI trust funds will be exhausted. That would not 
mean that Social Security benefits would cease, because taxes are 
projected to cover about 70 percent of benefits at that point, but the 
program could no longer sustain promised benefits out of earmarked tax 
receipts alone (see accompanying box for a fuller discussion).



---------------------------------------------------------------------------
  \5\ The long-range projections discussed in this chapter are based on 
an extension of the Administration's economic projections from the 
budget, which is different from the economic assumptions used by the 
actuaries. Under the extended Administration projections this point 
would be reached in 2019, not 2016, and the other key dates would come 
later also.
---------------------------------------------------------------------------

[[Page 21]]

------------------------------------------------------------------------

                   Social Security: The Long-Range Challenge

For 65 years, Social Security has provided retirement security and disability insurance for tens of millions of
 Americans through a self-financing system. The principle of self-financing is important because it compels
 corrections to the system in the event of projected financial imbalances.

Although Social Security is running surpluses today, OMB projects it will begin running cash deficits within 20
 years. Social Security's spending path is unsustainable, driven largely by the demographic trends of lower
 fertility rates and longer life spans. These trends indicate that the number of workers available to support
 each retiree will decline from 3.4 today to an estimated 2.1 in 2030. As a result, the Government will not be
 able to meet current-law benefit obligations at current payroll tax rates. At present, the Social Security
 system faces a closed-group actuarial deficit of $8.7 trillion.

The size of Social Security's shortfall cannot be known with any precision. Under the Social Security Trustees'
 2001 intermediate-cost economic and demographic assumptions, the gap between Social Security receipts and
 outlays in 2040 will be 1.7 percent of GDP. Under their high-cost assumptions, the shortfall in that year would
 be 72 percent larger, or 2.9 percent of GDP.

Long-range uncertainty underscores the importance of creating a system that is financially stable and self-
 contained. Otherwise, if pessimistic assumptions turn out to be accurate, the demands created by Social
 Security could compromise the rest of the budget and the Nation's economic health.

Moreover, the current structure of Social Security leads to substantial generational inequities in the average
 rate of return people can expect from the program. While previous generations fared well, individuals born
 today on average can expect to earn less than a two percent rate of return on their payroll tax contributions.
 This estimate may overstate the rate of return, because it assumes no changes in current-law taxes or benefits
 even though meeting the projected financing shortfall through benefit cuts or additional revenues would further
 reduce Social Security's implicit rate of return for future cohorts. A 1995 analysis found that the cohort born
 in 2000 would experience a 1.7 percent rate of return before accounting for Social Security's shortfall, and a
 1.5 percent rate of return after adjusting revenues to keep the system solvent.

One way to address the issues of uncertainty and declining rates of return, while protecting national savings,
 would be to allow individuals to keep some of their payroll taxes in personal retirement accounts. Giving
 workers the ability and the control to build wealth for their own retirement would lessen the pressure of
 adverse demographic trends on the long-range budget. Such accounts would reduce the need for a rapidly growing
 Government outlay by creating opportunities for younger workers to enjoy the fruits of higher rates of return
 in private equity markets. Personal retirement accounts could boost national savings, because they would be
 designed as investment vehicles. The current Social Security program, by contrast, is in essence a tax-and-
 transfer system that may or may not enhance national savings. The program's contribution to savings depends on
 Social Security's own financial status at any given point in time, as well as the extent to which the rest of
 the budget relies on Social Security surpluses to fund ongoing programs.

------------------------------------------------------------------------

[[Page 22]]

------------------------------------------------------------------------

                        Medicare: The Long-Range Challenge

According to the Medicare Trustees most recent 2001 report, the Hospital Insurance (HI) trust fund will go
 bankrupt in 2029, and spending will exceed taxes into the fund in 2016. The long-run outlook for the HI Trust
 Fund is measured by the actuarial balance. The actuarial balance reflects the financing changes needed (e.g.,
 benefit cuts, tax increase), expressed in terms of the tax rate increase required today to balance the HI Trust
 Fund over the next 75 years. In 2001, Trustees are projecting an actuarial deficit of -1.97 percent. This is a
 63 percent increase in the deficit over last year's estimate (-1.21 percent), due largely to the Trustee's
 acknowledgment that Medicare per capita expenditures will grow faster than they had previously assumed,
 outpacing per capita GDP growth by a full percent.

But, Medicare actually has two trust funds, not one: the HI and the SMI trust funds. Like HI, growth in per
 beneficiary SMI expenditures are projected to outpace per capita GDP growth by a full percent. In the short
 run, a comprehensive analysis of the Medicare program that takes into account both of these trust funds reveals
 that there is already a Medicare deficit, not a surplus. In fact, over the next ten years 2002-2011, the
 Medicare program will require annual transfers from the general revenue fund totaling $1.2 trillion to meet
 program expenditures.

The long-range projections of combined Medicare spending reveal substantial spending growth. Not only are per
 capita expenditures increasing rapidly, but the number of beneficiaries is skyrocketing as well. Between 2010
 and 2030, the number of persons age 65 and older will increase from 39.7 million to 69.1 million. As a result
 of this combination of factors, total Medicare expenditures are projected to quadruple as a percentage of GDP,
 from 2 percent in 2000 to 8 percent in 2075.

The Administration is committed to working with Congress to reform Medicare in a manner which improves the long-
 term solvency of the entire program without raising Medicare payroll taxes.

------------------------------------------------------------------------

  And in Medicare: Medicare faces a similar problem. Income to 
Medicare's Hospital Insurance (HI) trust fund is projected to exceed 
outgo until 2016, but the HI fund is projected to reach zero in 2029, 
nine years earlier than the OASDI trust funds. Unlike Social Security, 
Medicare has never been completely self-financed. In addition to the HI 
program, Medicare also consists of Supplementary Medical Insurance 
(SMI), which covers medical bills outside of the hospital. SMI is funded 
by a combination of premiums charged to the beneficiaries, which cover 
about one-quarter of benefits, and general revenue. Even if the HI trust 
fund were to remain solvent indefinitely, Medicare as a whole would 
continue to be subsidized by the rest of the budget. As Medicare costs 
rise, the subsidy increases, but even today Medicare is not self-
financing (see accompanying box for a fuller discussion).
  An Improved Long-Range Outlook.--At the beginning of the 1990s, when 
these long-run budget projections were first developed, the deficit was 
on an unstable trajectory. Given then-current economic projections and 
policies, the deficit was projected to mount steadily not only in dollar 
terms, but relative to the size of the economy. This pattern of rising 
deficits would have driven Federal debt held by the public to 
unsustainable levels. Policy actions during the 1990s reduced the 
deficits, and the strong economy that emerged in the second half of the 
1990s did even more to eliminate them.
  The unified budget is now projected to be in surplus for the next ten 
years. Even excluding the Social Security surplus, the rest of the 
budget is also projected to be in surplus over the same period. If 
realized, these surpluses will reduce the amount of Federal debt 
outstanding and lower the Government's net interest payments. In FY 
2000, net interest amounted to 2.3 percent of GDP; under current 
estimates, that could be cut to around 0.3 percent of GDP by 2010.
  If the policies and assumptions in the budget are extended beyond the 
ten-year budget window, the unified budget could continue in surplus for 
many more years. However, there is a wide range of uncertainty around 
such long-range projections. As discussed below, they are affected by 
many hard-to-foresee economic and demographic factors, as well as by 
future policy decisions.

  Economic and Demographic Assumptions.--Even though any such forecast 
is highly uncertain, long-run budget projections require starting with 
specific economic and demographic projections. The assumptions used as a 
starting point extend the Administration's medium-term economic 
projections, augmented by the long-run demographic projections from the 
2000 Social Security Trustees' Report.
     Inflation, unemployment and interest rates hold stable at 
          2.5 percent per year for CPI inflation, 4.6 percent for the 
          unemployment rate, and 5.7 percent for the yield on 10-year 
          Treasury notes.
     Productivity growth as measured by real GDP per hour 
          continues at the same constant rate as in

[[Page 23]]

          the Administration's medium-term projections--2.1 percent per 
          year.
     In line with the projections of the Social Security 
          Trustees, U.S. population growth is expected to slow from 1 
          percent per year in the 1990s to about half that rate by 2030.
     Labor force participation declines as the population ages 
          and the proportion of retirees increases.
     Real GDP growth declines gradually after 2011 from around 3 
          percent per year to an average annual rate of 2.3 percent, 
          because labor force growth is expected to slow while 
          productivity growth is assumed to be constant.
  The economic projections described above are set by assumption and do 
not automatically change in response to changes in the budget outlook. 
This is unrealistic, but it simplifies comparisons of alternative 
policies.

  Alternative Budget Projections.--Chart 2-4 below shows budget 
projections under alternative assumptions about discretionary spending. 
These projections generally assume that mandatory spending proceeds 
according to current law and proposed policy, without new programs or 
enhancements of existing programs except for those proposed in the 
budget. Under each of these alternatives, the major entitlement programs 
are expected to absorb an increasing share of budget resources.
     Social Security benefits, driven by the retirement of the 
          baby-boom generation, rise from 4.1 percent of GDP in 2000 to 
          6.3 percent in 2040. They continue to rise after that but more 
          gradually, eventually reaching 6.8 percent of GDP by 2075. \6\
---------------------------------------------------------------------------
  \6\ These benefit estimates reflect the economic assumptions described 
above, which differ somewhat from the assumptions in the Social Security 
Trustees' Report. The benefit estimates were prepared by the Social 
Security actuaries using OMB economic assumptions.
---------------------------------------------------------------------------
     Medicare outlays net of premiums rise from 2.0 percent of 
          GDP in 2000 to 5.0 percent of GDP in 2040, and 8.1 percent by 
          2075.
     Federal Medicaid spending goes up from 1.2 percent of GDP 
          in 2000 to 2.7 percent in 2040 and to 3.5 percent of GDP in 
          2075.
     If discretionary spending is held constant in real terms, 
          it would fall as a share of GDP from 6.3 percent in 2000 to 
          3.1 percent in 2040, and to 1.9 percent in 2075. 
          Alternatively, discretionary spending may be fixed as a share 
          of GDP at the level reached in 2011, when the budget window 
          closes, maintaining a constant 5 percent share of GDP through 
          2075.



[[Page 24]]

                          Table 2-2.  LONG-RUN BUDGET PROJECTIONS OF 2002 BUDGET POLICY
                                                (Percent of GDP)
----------------------------------------------------------------------------------------------------------------
                                           2000    2005    2010    2020    2030    2040    2050    2060    2075
----------------------------------------------------------------------------------------------------------------
Discretionary Grows with Inflation
  Receipts..............................    20.6    19.2    18.6    18.6    18.7    18.7    18.8    18.8    18.7
  Outlays...............................    18.2    17.1    15.8    15.2    15.6    15.8    15.9    16.5    18.9
     Discretionary......................     6.3     5.9     5.2     4.3     3.7     3.1     2.7     2.3     1.9
     Mandatory..........................     9.7    10.0    10.3    12.1    14.1    15.2    16.1    17.2    19.2
       Social Security..................     4.1     4.1     4.2     5.3     6.2     6.3     6.3     6.5     6.8
       Medicare.........................     2.0     2.2     2.3     3.1     4.1     5.0     5.8     6.6     8.1
       Medicaid.........................     1.2     1.4     1.7     2.1     2.4     2.7     3.0     3.2     3.5
       Other............................     2.4     2.2     2.0     1.7     1.4     1.2     1.0     0.9     0.8
     Net Interest.......................     2.3     1.1     0.3    -1.2    -2.1    -2.5    -2.9    -2.9    -2.2
  Surplus/Deficit(-)....................     2.4     2.1     2.8     3.4     3.0     2.9     2.9     2.3    -0.2
  Primary Surplus/Deficit (-)...........     4.7     3.3     3.1     2.1     0.9     0.4     0.0    -0.6    -2.3
  Federal Debt Held by Public...........    34.7    17.5     2.3   -25.5   -42.3   -50.8   -56.8   -58.2   -41.7

Discretionary Grows with GDP
  Receipts..............................    20.6    19.2    18.6    18.6    18.7    18.7    18.8    18.8    18.7
  Outlays...............................    18.2    17.1    15.8    16.1    17.7    19.3    21.1    23.7    29.5
     Discretionary......................     6.3     5.9     5.2     5.0     5.0     5.0     5.0     5.0     5.0
     Mandatory..........................     9.7    10.0    10.3    12.1    14.1    15.2    16.1    17.2    19.2
       Social Security..................     4.1     4.1     4.2     5.3     6.2     6.3     6.3     6.5     6.8
       Medicare.........................     2.0     2.2     2.3     3.1     4.1     5.0     5.8     6.6     8.1
       Medicaid.........................     1.2     1.4     1.7     2.1     2.4     2.7     3.0     3.2     3.5
       Other............................     2.4     2.2     2.0     1.7     1.4     1.2     1.0     0.9     0.8
     Net Interest.......................     2.3     1.1     0.3    -1.1    -1.4    -0.9     0.0     1.5     5.3
  Surplus/Deficit(-)....................     2.4     2.1     2.8     2.5     1.0    -0.5    -2.3    -4.8   -10.8
  Primary Surplus/Deficit (-)...........     4.7     3.3     3.1     1.5    -0.4    -1.5    -2.3    -3.3    -5.5
  Federal Debt Held by Public...........    34.7    17.5     2.3   -21.8   -27.5   -17.8     1.3    31.7   108.0
----------------------------------------------------------------------------------------------------------------

  There is an important caveat to these results, however. The Federal 
Government is assumed to acquire financial assets once the publicly held 
Federal debt has been run down. This would be a unique departure for the 
Government, and it would encounter significant obstacles. Under current 
policy, the Government's investment options would be quite limited. 
Moreover, if the Federal Government were to own a large share of the 
Nation's financial assets, the economy's dynamism could be undermined by 
the Government's influence over what had been private economic choices. 
This could reduce the efficiency of the capital markets and lower the 
long-term rate of economic growth. These negative effects are not 
considered in these simulations.
  Overall, it seems unlikely that the Government would ever accumulate a 
large net stock of assets, but these long-range projections show what 
could happen absent policy changes, and they indicate that policy makers 
will soon need to consider the issue of Government ownership of private 
assets. If spending was increased or taxes adjusted from year-to-year in 
order to avoid Government's accumulation of private assets, the budget 
could remain in balance through 2050, assuming real discretionary 
spending is held constant in the long run. Alternatively, if 
discretionary spending grows with GDP in the long run, the budget is 
projected to stay in balance until 2028, while avoiding a buildup of 
assets.

  The Effects of Alternative Economic and Technical Assumptions.--The 
results discussed above are sensitive to changes in underlying economic 
and technical assumptions. Some of the most important of these 
alternative economic and technical assumptions and their effects on the 
budget outlook are discussed below. Each highlights one of the key 
uncertainties in the outlook.
  1. Health Spending:  OMB's long-range projections for Medicare follow 
the latest projections of the Medicare actuaries reflected in the 
Medicare Trustees' Report. For many years, those projections included a 
slowdown in the rate of growth of real per capita Medicare spending in 
the long run. Recently, the Technical Review Panel on the Medicare 
Trustees' Reports has recommended raising the long-run projected growth 
rate in real per capita Medicare costs, and the Medicare Trustees 
adopted this assumption in their 2001 report. The Panel recommended 
projections in which ``age-and gender-adjusted, per-beneficiary spending 
growth exceeds the growth of per-capita GDP by 1 percentage point per 
year.'' \7\ In Chart 2-4, real per capita Medicare benefits are assumed 
to rise at this rate, which is about 60 percent greater than assumed in 
previous Medicare Trustees' Reports.
---------------------------------------------------------------------------
  \7\ Technical Review Panel on the Medicare Trustees' Reports, ``Review 
of Assumptions and Methods of the Medicare Trustees' Financial 
Projections,'' December 2000.
---------------------------------------------------------------------------
   Eventually, the rising trend in health care costs for both Government 
and the private sector will have to end, but it is hard to know when and 
how that will happen. ``Eventually'' could be a long way off. Improved 
health and increased longevity are highly valued, and society may be 
willing spend a larger share of income on them than it has heretofore. 
There are many reasonable alternative health cost and usage projections, 
as well as variations in the demographic projections to which they can 
be applied. Innovations in health care

[[Page 25]]

are proceeding rapidly, and they have diverse effects on the projection 
of costs. Likewise, the effects of greater longevity on Medicare and 
especially Medicaid costs are uncertain.
  2. Discretionary Spending: The assumption used to project 
discretionary spending is essentially arbitrary, because discretionary 
spending is determined annually through the legislative process, and no 
formula can dictate future spending in the absence of legislation. 
Alternative assumptions are made for discretionary spending. In one 
case, discretionary spending is held constant in real terms, growing 
only with projected inflation. Alternatively, discretionary spending is 
assumed to keep pace with the growth in GDP. Growth with inflation 
implies that the real value of Federal services is unchanging over time, 
which has the implication that the size of Federal discretionary 
spending would shrink relative to the size of the economy. The second 
alternative for current policy considered in Chart 2-4 and Table 2-2 
allows discretionary spending to increase with GDP. This implies that 
discretionary spending increases in real terms whenever there is 
positive real economic growth.
  3. Productivity: The rate of future productivity growth is perhaps the 
most powerful of the uncertainties affecting the long-run budget 
outlook. Productivity in the U.S. economy slowed markedly and 
unexpectedly after 1973. This slowdown was responsible for a slower rise 
in U.S. real incomes for the next two decades. Recently, productivity 
growth has increased. Since 1995, productivity has grown about as fast 
as it did during the 25-year period prior to 1973. The revival of 
productivity growth is one of the most welcome developments of the last 
several years. A higher rate of growth makes the task of preserving a 
balanced budget much easier; a lower productivity growth rate has the 
opposite effect. Although the long-run growth rate of productivity is 
inherently uncertain, productivity growth in the United States has 
averaged about 2 percent per year for over a century, and is projected 
to continue at that rate in these projections.
  4. Population: The key assumptions underlying the model's demographic 
projections concern fertility, immigration, and mortality.
     The demographic projections assume that fertility will 
          average around 1.95 births per woman in the future, slightly 
          below the replacement rate needed to maintain a constant 
          population.
     The rate of immigration is assumed to average around 
          900,000 per year in these projections. Higher immigration 
          relieves some of the pressure on population from low 
          fertility.
     Mortality is projected to decline. The average female 
          lifespan is projected to rise from 79.5 years to 85.0 years by 
          2075. Men do not live as long as women on average, but their 
          lifespan is also projected to increase, from 73.8 years in 
          2000 to 80.9 years by 2075. A Technical Panel to the Social 
          Security Trustees reported that the improvement in longevity 
          might be greater than this. If so, growth of the three big 
          entitlement programs could be even faster.

  Conclusion.--Since the early 1990s, the long-run budget outlook has 
improved significantly, but the outlook remains highly uncertain. Under 
some scenarios, the unified budget surplus could continue for many 
years, but with alternative assumptions, the deficit returns much 
sooner. Although there is an extended period of budget surpluses under 
most current projections, how big the surpluses will be and how long 
they will last remain quite uncertain. Under an adverse combination of 
assumptions, the fiscal picture could deteriorate, leading to an 
unsustainable debt build-up. With more favorable assumptions, however, 
there would be a constantly rising unified budget surplus through the 
75-year projection period. The enormous range of possible outcomes 
highlights the sensitivity of long-term projections to specific 
assumptions and cautions against undue reliance on any particular 
projection path.
  While the overall budget outlook has improved, the entitlement 
programs are still expected to give rise to budget strains. Fundamental 
changes are needed to preserve the basic promises embodied in Social 
Security and Medicare. 


   Actuarial Balance in the Social Security and Medicare Trust Funds:

  The Trustees for the Social Security and Hospital Insurance trust 
funds issue annual reports that include projections of income and outgo 
for these funds over a 75-year period. These projections are based on 
different methods and assumptions than the long-run budget projections 
presented above, although the budget projections do rely on the Social 
Security assumptions for population growth and labor force growth after 
the year 2011. Even with these differences, the message is similar: The 
retirement of the baby-boom generation coupled with expected high rates 
of growth in per capita health care costs will exhaust the trust funds 
unless further remedial action is taken.
  The Trustees' reports feature the 75-year actuarial balance of the 
trust funds as a summary measure of their financial status. For each 
trust fund, the balance is calculated as the change in receipts or 
program benefits (expressed as a percentage of taxable payroll) that 
would be needed to preserve a small positive balance in the trust fund 
at the end of 75 years. Table 2-3 shows the changes in the 75-year 
actuarial balances of the Social Security and Medicare trust funds from 
1999 to 2001. There were improvements in the consolidated OASDI trust 
fund and a deterioration in the HI trust fund. The changes were due to 
revisions in the actuarial assumptions. In the case of the OASDI funds, 
a small improvement in the economic assumptions was made, along with a 
similar change in the technical assumptions. For the HI program the 
Trustees revised their economic and technical assumptions. The change in 
economic and demographic assumptions made a small improvement in the 
actuarial balance, but this was more than offset by the large change in 
technical

[[Page 26]]

 Table 2-3.  CHANGE IN 75-YEAR ACTUARIAL BALANCE FOR OASDI AND HI TRUST
                    FUNDS (INTERMEDIATE ASSUMPTIONS)
                     (As percent of taxable payroll)
------------------------------------------------------------------------
                                           OASI     DI     OASDI    HI
------------------------------------------------------------------------
Actuarial balance in 1999 Trustees'        -1.70   -0.36   -2.07   -1.46
 Report.................................

Changes in balance due to changes in:...
   Legislation..........................    0.00    0.00    0.00   -0.02
   Valuation period.....................   -0.06   -0.01   -0.07   -0.03
   Economic and demographic assumptions.    0.06    0.01    0.07    0.10
   Technical and other assumptions......    0.18   -0.01    0.17    0.20
                                         -------------------------------
     Total Changes......................    0.18   -0.01    0.17    0.25

Actuarial balance in 2000 Trustees'        -1.53   -0.37   -1.89   -1.21
 Report.................................
Changes in balance due to changes in:...
   Legislation..........................    0.00    0.00    0.00   -0.03
   Valuation period.....................   -0.06   -0.01   -0.07   -0.04
 Economic and demographic assumptions...    0.10    0.01    0.11    0.08
   Technical and other assumptions......   -0.04    0.04    0.00   -0.77
                                         -------------------------------
     Total Changes......................   -0.01    0.04    0.03   -0.76

Actuarial balance in 2001 Trustees'        -1.53   -0.33   -1.86   -1.97
 Report.................................
------------------------------------------------------------------------

assumptions. The Trustees adopted the recommendations of their Technical 
Review Panel and boosted the growth rate of real per capita Medicare 
spending substantially. The actuarial deficiency in Medicare now exceeds 
the deficiency calculated for Social Security.

                  PART III--NATIONAL WEALTH AND WELFARE

  Unlike a private corporation, the Federal Government routinely invests 
in ways that do not add directly to its assets. For example, Federal 
grants are frequently used to fund capital projects by State or local 
governments for highways and other purposes. Such investments are 
valuable to the public, which pays for them with taxes, but they are not 
owned by the Federal Government and would not show up on a conventional 
balance sheet for the Government.
  The Federal Government also invests in education and research and 
development (R&D). These outlays contribute to future productivity and 
are analogous to an investment in physical capital. Indeed, economists 
have computed stocks of human and knowledge capital to reflect the 
accumulation of such investments. Nonetheless, such hypothetical capital 
stocks are obviously not owned by the Federal Government, nor would they 
appear on a balance sheet as a Government asset.
  To show the importance of these kinds of issues, Table 2-4 presents a 
national balance sheet. It includes estimates of national wealth 
classified into three categories: physical assets, education capital, 
and R&D capital. The Federal Government has made contributions to each 
of these categories of capital, and these contributions are shown 
separately in the table. Data in this table are especially uncertain, 
because of the strong assumptions needed to prepare the estimates.
  The conclusion of the table is that Federal investments are 
responsible for about 7 percent of total national wealth. This may seem 
like a small fraction, but it represents a large volume of capital--$5 
trillion. The Federal contribution is down from around 9 percent in the 
mid-1980s, and from around 12 percent in 1960. Much of this reflects the 
shrinking size of the defense capital stocks, which have gone down from 
12 percent of GDP to 7 percent since the end of the Cold War. 

Physical Assets:

  The physical assets in the table include stocks of plant and 
equipment, office buildings, residential structures, land, and the 
Government's physical assets such as military hardware and highways. 
Automobiles and consumer appliances are also included in this category. 
The total amount of such capital is vast, around $39 trillion in 2000, 
consisting of $33 trillion in private capital and $6 trillion in public 
capital; by comparison, GDP was about 10 trillion.
  The Federal Government's contribution to this stock of capital 
includes its own physical assets plus $1 trillion in accumulated grants 
to State and local Governments for capital projects. The Federal 
Government has financed about one-fourth of the physical capital held by 
other levels of Government.

Education Capital:

  Economists have developed the concept of human capital to reflect the 
notion that individuals and society invest in people as well as in 
physical assets. Investment in education is a good example of how human 
capital is accumulated.
  This table includes an estimate of the stock of capital represented by 
the Nation's investment in formal education and training. The estimate 
is based on the cost of replacing the years of schooling embodied in the 
U.S. population aged 16 and over; in other words, the idea

[[Page 27]]

                                                               Table 2-4.  NATIONAL WEALTH
                                            (As of the end of the fiscal year, in trillions of 2000 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1960    1965    1970    1975    1980    1985    1990    1995    1998    1999    2000
--------------------------------------------------------------------------------------------------------------------------------------------------------

                             ASSETS

Publicly Owned Physical Assets:

  Structures and Equipment......................................     2.0     2.2     2.8     3.4     3.6     3.8     4.2     4.6     4.9     5.0     5.0
     Federally Owned or Financed................................     1.1     1.2     1.4     1.4     1.5     1.8     1.9     2.0     1.9     1.9     2.0
       Federally Owned..........................................     1.0     1.0     1.0     0.9     0.9     1.1     1.1     1.1     1.0     1.0     1.0
       Grants to State and Local Governments....................     0.1     0.2     0.3     0.5     0.6     0.7     0.8     0.9     0.9     1.0     1.0
     Funded by State and Local Governments......................     0.8     1.0     1.4     1.9     2.1     2.1     2.3     2.6     2.9     3.1     3.0
  Other Federal Assets..........................................     0.7     0.7     0.6     0.8     1.2     1.3     1.1     0.8     0.8     0.9     1.1
                                                                 ---------------------------------------------------------------------------------------
    Subtotal....................................................     2.7     2.9     3.4     4.2     4.8     5.1     5.2     5.4     5.7     5.9     6.0

Privately Owned Physical Assets:
  Reproducible Assets                                                6.9     7.9     9.6    12.3    15.8    16.9    19.1    20.8    23.0    24.0    25.1
     Residential Structures.....................................     2.6     3.1     3.7     4.7     6.3     6.6     7.5     8.4     9.4     9.9    10.3
     Nonresidential Plant and Equipment.........................     2.8     3.1     3.9     5.1     6.5     7.2     8.0     8.8     9.7    10.1    10.6
     Inventories................................................     0.6     0.7     0.8     1.0     1.3     1.2     1.3     1.3     1.4     1.4     1.5
     Consumer Durables..........................................     0.8     1.0     1.2     1.4     1.7     1.8     2.3     2.4     2.5     2.6     2.7
  Land..........................................................     2.0     2.4     2.7     3.5     5.4     6.2     6.4     4.7     6.1     6.6     7.3
                                                                 ---------------------------------------------------------------------------------------
    Subtotal....................................................     8.9    10.2    12.4    15.8    21.2    23.1    25.4    25.6    29.1    30.6    32.5

Education Capital:
  Federally Financed............................................     0.1     0.1     0.2     0.3     0.4     0.6     0.7     0.8     1.0     1.0     1.1
  Financed from Other Sources...................................     6.0     7.6    10.3    12.7    16.5    19.9    25.6    28.3    32.3    34.4    36.3
                                                                 ---------------------------------------------------------------------------------------
    Subtotal....................................................     6.1     7.7    10.5    13.0    16.9    20.5    26.4    29.1    33.3    35.4    37.4

Research and Development Capital:
  Federally Financed R&D........................................     0.2     0.3     0.5     0.5     0.6     0.7     0.8     0.9     0.9     1.0     1.0
  R&D Financed from Other Sources...............................     0.1     0.2     0.3     0.4     0.5     0.6     0.8     1.1     1.3     1.3     1.4
                                                                 ---------------------------------------------------------------------------------------
    Subtotal....................................................     0.3     0.5     0.8     0.9     1.0     1.3     1.6     2.0     2.2     2.3     2.4
                                                                 =======================================================================================
Total Assets....................................................    17.9    21.4    27.1    33.9    44.0    50.0    58.7    62.0    70.3    74.2    78.3

Net Claims of Foreigners on U.S. (+)............................    -0.1    -0.2    -0.2    -0.1    -0.3     0.0     0.8     1.5     2.5     3.4     3.4

Balance.........................................................    18.0    21.6    27.2    34.0    44.3    50.0    57.9    60.5    67.8    70.8    74.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADDENDA:........................................................

 Per Capita Balance (thousands of dollars)......................    99.4   111.2   132.7   157.3   194.1   209.1   230.9   229.5   250.0   258.8   271.4
 Ratio of Balance to GDP (in percent)...........................     7.0     6.7     7.1     7.7     8.4     8.0     8.0     7.4     7.3     7.3     7.4
 Total Federally Funded Capital (trillions 2000 $)..............     2.1     2.3     2.7     3.1     3.8     4.3     4.5     4.5     4.7     4.8     5.1
 Percent of National Wealth.....................................    11.4    10.7     9.8     9.1     8.5     8.7     7.8     7.4     6.9     6.8     6.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

is to measure how much it would cost to reeducate the U.S. workforce at 
today's prices (rather than at its original cost). This is more 
meaningful economically than the historical cost, and is comparable to 
the measures of physical capital presented earlier.
  Although this is a relatively crude measure, it does provide a rough 
order of magnitude for the current value of the investment in education. 
According to this measure, the stock of education capital amounted to 
$37 trillion in 2000, of which about 3 percent was financed by the 
Federal Government. It is nearly equal to the total value of the 
Nation's stock of physical capital. The main investors in education 
capital have been State and local governments, parents, and students 
themselves (who forgo earning opportunities in order to acquire 
education).
  Even broader concepts of human capital have been suggested. Not all 
useful training occurs in a schoolroom or in formal training programs at 
work. Much informal learning occurs within families or on the job, but 
measuring its value is very difficult. However, labor compensation 
amounts to about two-thirds of national income, and thinking of this 
income as the product of human capital suggests that the total value of 
human capital might be two times the estimated value of physical 
capital. Thus, the estimates offered here are in a sense conservative, 
because they reflect only the costs of acquiring formal education and 
training.

Research and Development Capital:

  Research and Development can also be thought of as an investment, 
because R&D represents a current expenditure that is made in the 
expectation of earning a future return. After adjusting for 
depreciation, the flow of R&D investment can be added up to provide an 
estimate of the current R&D stock. \8\ That stock is estimated to have 
been about $2 trillion in 2000. Although this is a large amount of 
research, it is a relatively small portion of total National wealth. Of 
this stock, about 40 percent was funded by the Federal Government.
---------------------------------------------------------------------------
  \8\ R&D depreciates in the sense that the economic value of applied 
research and development tends to decline with the passage of time, as 
still newer ideas move the technological frontier.
---------------------------------------------------------------------------

Liabilities:

  When considering how much the United States owes as a Nation, the 
debts that Americans owe to one an

[[Page 28]]

other cancel out. This means they do not belong in Table 2-4, which is 
intended to show National totals only, but it does not mean they are 
unimportant. The only debt that appears in Table 2-4 is the debt that 
Americans owe to foreign investors. America's foreign debt has been 
increasing rapidly in recent years, because of the rising deficit in the 
U.S. current account, but even so, the size of this debt remains small 
compared with the total stock of U.S. assets. It amounted to 4 percent 
of total assets 2-4 in 2000.
  Most Federal debt does not appear in Table 2-4 because it is held by 
Americans; only that portion of the Federal debt held by foreigners is 
included. However, comparing the Federal Government's net liabilities 
with total national wealth gives another indication of the relative 
magnitude of the imbalance in the Government's accounts. Currently, 
Federal net liabilities, as reported in Table 2-1, amount to about 4 
percent of net U.S. wealth as shown in Table 2-4.

                        Trends in National Wealth

  The net stock of wealth in the United States at the end of FY 2000 was 
about $75 trillion. Since 1980, it has increased in real terms at an 
average annual rate of 2.7 percent per year--only slightly more than 
half as fast as it averaged from 1960 to 1980--4.6 percent per year. 
Public physical capital formation has slowed even more drastically. 
Since 1980, public physical capital has increased at an annual rate of 
only 1.1 percent, compared with 3.0 percent over the previous 20 years.
  The net stock of private nonresidential plant and equipment grew 2.4 
percent per year from 1980 to 2000, compared with 4.4 percent in the 
1960s and 1970s; and the stock of business inventories increased even 
less, just 0.7 percent per year on average since 1980. However, private 
nonresidential fixed capital has increased much more rapidly since 
1995--3.9 percent per year--reflecting the recent investment boom.
  The accumulation of education capital, as measured here, has also 
slowed down since 1980, but not as much. It grew at an average rate of 
5.2 percent per year in the 1960s and 1970s, about 0.9 percentage point 
faster than the average rate of growth in private physical capital 
during the same period. Since 1980, education capital has grown at a 4.0 
percent annual rate. This reflects both the extra resources devoted to 
schooling in this period, and the fact that such resources were 
increasing in economic value. R&D stocks have grown at about 4.3 percent 
per year since 1980, the fastest growth rate for any major category of 
investment over this period, but slower than the growth of R&D in the 
1960s and 1970s.

               Other Federal Influences on Economic Growth

  Federal investment decisions, as reflected in Table 2-4, obviously are 
important, but the Federal Government also contributes to wealth in ways 
that cannot be easily captured in a formal presentation. The Federal 
Reserve's monetary policy affects the rate and direction of capital 
formation in the short run, and Federal regulatory and tax policies also 
affect how capital is invested, as do the Federal Government's policies 
on credit assistance and insurance.

                            Social Indicators

  There are certain broad responsibilities that are unique to the 
Federal Government. Especially important are fostering healthy economic 
conditions, promoting health and social welfare, and protecting the 
environment. Table 2-5 offers a rough cut of information that can be 
useful in assessing how well the Federal Government has been doing in 
promoting these general objectives.

  The indicators shown here are a limited subset drawn from the vast 
array of available data on conditions in the United States. In choosing 
indicators for this table, priority was given to measures that were 
consistently available over an extended period. Such indicators make it 
easier to draw valid comparisons and evaluate trends. In some cases, 
however, this meant choosing indicators with significant limitations.
  The individual measures in this table are influenced to varying 
degrees by many Government policies and programs, as well as by external 
factors beyond the Government's control. They do not measure the 
outcomes of Government policies, because they generally do not show the 
direct results of Government activities, but they do provide a 
quantitative measure of the progress or lack of progress in reaching 
some of the ultimate values that Government policy is intended to 
promote.
  Such a table can serve two functions. First, it highlights areas where 
the Federal Government might need to modify its current practices or 
consider new approaches. Where there are clear signs of deteriorating 
conditions, corrective action might be appropriate. Second, the table 
provides a context for evaluating other data on Government activities. 
For example, Government actions that weaken its own financial position 
may be appropriate when they promote a broader social objective. The 
Government cannot avoid making such trade-offs because of its size and 
the broad ranging effects of its actions. Monitoring these effects and 
incorporating them in the Government's policy making is a major 
challenge.
  It is worth noting that, in recent years, many of the indicators in 
this table have turned around. The improvement in economic conditions 
has been widely noted, but there have also been some significant social 
improvements. Perhaps, most notable has been the turnaround in the crime 
rate. Since reaching a peak in the early 1990s, the violent crime rate 
has fallen by over 25 percent. The turnaround has been especially 
dramatic in the murder rate, which was lower in 1999 than at any time 
since the 1960s.

                   An Interactive Analytical Framework

  No single framework can encompass all of the factors that affect the 
financial condition of the Federal Gov

[[Page 29]]

Table 2-5.  ECONOMIC AND SOCIAL INDICATORS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
       General categories                              Specific measures                         1960     1965     1970     1975     1980     1985     1990     1995     1998     1999     2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
   Living Standards.............  Real GDP per person (1996 dollars).........................   13,145   15,587   17,445   18,909   21,523   23,971   26,832   28,673   31,470   32,512   33,837
                                     average annual percent change (5-year trend)............      0.7      3.5      2.3      1.6      2.6      2.2      2.3      1.3      2.3      2.9      3.4
                                  Median Income (1999 dollars):
                                     All Households..........................................      N/A      N/A   35,232   34,980   35,850   36,568   38,168   37,251   39,744   40,816      N/A
                                     Married Couple Families.................................   30,386   35,390   42,420   44,072   46,844   48,153   50,853   51,447   55,377   56,676      N/A
                                     Female Householder, No Spouse Present...................   15,356   17,206   20,545   20,288   21,069   21,150   21,583   21,526   22,652   23,732      N/A
                                  Income Share of Lower 60% of All Families..................     34.8     35.2     35.2     35.2     34.5     32.7     32.0     30.3     29.8     29.8      N/A
                                  Poverty Rate (%) \1\.......................................     22.2     17.3     12.6     12.3     13.0     14.0     13.5     13.8     12.7     11.8      N/A

   Economic Security............  Civilian Unemployment (%)..................................      5.5      4.5      4.9      8.5      7.1      7.2      5.5      5.6      4.5      4.2      4.0
                                  CPI-U (% Change)...........................................      1.7      1.6      5.8      9.1     13.5      3.5      5.4      2.8      1.6      2.1      3.4

   Employment...................  Increase in Total Payroll Employment Previous 12 Months          0.4      2.2     -0.1      0.5     -0.3      2.0      0.4      0.4      1.9      1.9      1.3
                                   (millions)................................................
                                  Managerial or Professional Jobs (% of civilian employment).      N/A      N/A      N/A      N/A      N/A     24.1     25.8     28.3     29.6     30.3     30.2

   Wealth Creation..............  Net National Saving Rate (% of GDP)........................     10.2     12.1      8.2      6.6      7.5      6.1      4.6      4.7      6.6      6.0      5.6

   Innovation...................  Patents Issued to U.S. Residents (thousands)...............     42.3     54.1     50.6     51.5     41.7     45.1     53.0     64.5     90.7     94.1     91.2
                                  Multifactor Productivity (average annual percent change)...      0.8      2.8      0.8      1.1      0.8      0.6      0.5      0.6      1.1      N/A      N/A

Environment:....................
  Air Quality...................  Nitrogen Oxide Emissions (thousand short tons).............   14,140   16,579   20,928   22,632   24,384   23,198   24,049   24,921   24,454      N/A      N/A
                                  Sulfur Dioxide Emissions (thousand short tons).............   22,227   26,750   31,161   28,011   25,905   23,658   23,660   19,181   19,647      N/A      N/A
                                  Lead Emissions (thousand short tons).......................      N/A      N/A      221      160       74       23        4        4        4      N/A      N/A

  Water Quality.................  Population Served by Secondary Treatment or Better (mils)..      N/A      N/A      N/A      N/A      N/A      134      155      166      N/A      N/A      N/A

Social:
   Families.....................  Children Living with Mother Only (% of all children).......      9.2     10.2     11.6     16.4     18.6     20.2     21.6     24.0     23.6     22.4      N/A

   Safe Communities.............  Violent Crime Rate (per 100,000 population) \2\............      160      199      364      482      597      557      732      685      568      525      N/A
                                  Murder Rate (per 100,000 population) \2\...................        5        5        8       10       10        8        9        8        6        6      N/A
                                  Murders/Manslaughter (per 100,000 Persons Age 14 to 17)....      N/A      N/A      N/A       11       13       10       24       24       13       11      N/A

  Health........................  Infant Mortality (per 1000 Live Births)....................     26.0     24.7     20.0     16.1     12.6     10.6      9.2      7.6      7.2      7.1      N/A
                                  Low Birthweight [<2,500 gms] Babies (%)....................      7.7      8.3      7.9      7.4      6.8      6.8      7.0      7.3      7.6      7.6      N/A
                                  Life Expectancy at birth (years)...........................     69.7     70.2     70.8     72.6     73.7     74.7     75.4     75.8     76.7      N/A      N/A
                                  Cigarette Smokers (% population 18 and older)..............      N/A     41.9     39.2     36.3     33.0     29.9     25.3     24.6     24.0      N/A      N/A

  Learning......................  High School Graduates (% of population 25 and older).......     44.6     49.0     55.2     62.5     68.6     73.9     77.6     81.7     82.8     83.4      N/A
                                  College Graduates (% of population 25 and older)...........      8.4      9.4     11.0     13.9     17.0     19.4     21.3     23.0     24.4     25.2      N/A
                                  National Assessment of Educational Progress \3\:
                                    Mathematics High School Seniors..........................      N/A      N/A      N/A      302      300      301      305      307      308      308      N/A
                                     Science High School Seniors.............................      N/A      N/A      305      293      286      288      290      295      295      295      N/A

   Participation................  Individual Charitable Giving per Capita (2000 dollars).....      225      270      323      343      374      385      427      410      526      N/A      N/A
                                  (by presidential election year)............................   (1960)   (1964)   (1968)   (1972)   (1976)   (1980)   (1984)   (1988)   (1992)   (1996)   (2000)
                                  Voting for President (% eligible population)...............     62.8     61.9     60.9     55.2     53.5     52.8     53.3     50.3     55.1     49.0    52.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
N/A = Not applicable.

\1\ The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.

\2\ Not all crimes are reported, and the fraction that go unreported may have varied over time.

\3\ Some data from the national educational assessments have been interpolated.

ernment. Nor can any framework serve as a substitute for actual 
analysis. Nevertheless, the framework presented here offers a useful way 
to examine the financial aspects of Federal policies. Increased Federal 
support for investment, the promotion of national saving through fiscal 
policy, and other Administration policies to enhance economic growth are 
expected to promote national wealth and improve the future financial 
condition of the Federal Government. As that occurs, the efforts will be 
revealed in these tables.

        TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATING

                  Federally Owned Assets and Liabilities

Assets:

  Financial Assets: The source of data is the Federal Reserve Board's 
Flow-of-Funds Accounts.

Physical Assets:

  Fixed Reproducible Capital: Estimates were developed for the OMB 
historical data base for physical capital outlays and software 
purchases. The data base extends back to 1940 and was supplemented by 
data from other selected sources for 1915-1939. Data are presented in 
Chapter 6 of this volume.
  Fixed Nonreproducible Capital: Historical estimates for 1960-1985 were 
based on estimates in Michael J. Boskin, Marc S. Robinson, and Alan M. 
Huber, ``Government Saving, Capital Formation and Wealth in the

[[Page 30]]

United States, 1947-1985,'' published in The Measurement of Saving, 
Investment, and Wealth, edited by Robert E. Lipsey and Helen Stone Tice 
(The University of Chicago Press, 1989).
  Estimates were updated using changes in the value of private land from 
the Flow-of-Funds Balance Sheets and from the Agriculture Department for 
farm land; the value of Federal oil deposits was extrapolated using the 
Producer Price Index for Crude Energy Materials.

Liabilities:

  Financial Liabilities: The principal source of data is the Federal 
Reserve's Flow-of-Funds Accounts.
  Insurance Liabilities: Sources of data are the OMB Pension Guarantee 
Model and OMB estimates based on program data. Historical data on 
liabilities for deposit insurance were also drawn from CBO's study, The 
Economic Effects of the Savings and Loan Crisis, issued January 1992.
  Pension Liabilities: For 1979-1999, the estimates are the actuarial 
accrued liabilities as reported in the annual reports for the Civil 
Service Retirement System, the Federal Employees Retirement System, and 
the Military Retirement System (adjusted for inflation). Estimates for 
the years before 1979 are extrapolations. The estimate for 2000 is a 
projection. The health insurance liability was estimated by the program 
actuaries for 1997-2000, and extrapolated back for earlier years.

                       Long-Run Budget Projections

  The long-run budget projections are based on long-run demographic and 
economic assumptions. A simplified model of the Federal budget, 
developed at OMB, computes the budgetary implications of these 
projections.
  Demographic and Economic Projections: For the years 2001-2011, the 
assumptions are identical to those used in the budget. These budget 
assumptions reflect the President's policy proposals. The economic 
assumptions in the budget are extended by holding constant inflation, 
interest rates, and unemployment at the levels assumed in the final year 
of the budget. Population growth and labor force growth are extended 
using the intermediate assumptions from the 2000 Social Security 
Trustees' report. The projected rate of growth for real GDP is built up 
from the labor force assumptions and an assumed rate of productivity 
growth. The assumed rate of productivity growth is held constant at the 
average rate of growth implied by the budget's economic assumptions.
  Budget Projections: For the period through 2011, the projections 
follow the budget. Beyond the budget horizon, receipts are projected 
using simple rules of thumb linking income taxes, payroll taxes, excise 
taxes, and other receipts to projected tax bases derived from the 
economic forecast. Outlays are computed in different ways. Discretionary 
spending is projected to grow at the rate of inflation or at the rate of 
growth in nominal GDP. Social Security is projected by the Social 
Security actuaries using these long-range assumptions. Federal pensions 
are derived from the most recent actuarial forecasts available at the 
time the budget was prepared, repriced using Administration inflation 
assumptions. Medicaid outlays are based on the economic and demographic 
projections in the model. Other entitlement programs are projected based 
on rules of thumb linking program spending to elements of the economic 
and demographic forecast such as the poverty rate.

                       National Balance Sheet Data

  Publicly Owned Physical Assets: Basic sources of data for the 
federally owned or financed stocks of capital are the Federal investment 
flows described in Chapter 6. Federal grants for State and local 
Government capital are added, together with adjustments for inflation 
and depreciation in the same way as described above for direct Federal 
investment. Data for total State and local Government capital come from 
the revised capital stock data prepared by the Bureau of Economic 
Analysis extrapolated for 2000.
  Privately Owned Physical Assets: Data are from the Flow-of-Funds 
national balance sheets and from the private net capital stock estimates 
prepared by the Bureau of Economic Analysis extrapolated for 2000 using 
investment data from the National Income and Product Accounts.
  Education Capital: The stock of education capital is computed by 
valuing the cost of replacing the total years of education embodied in 
the U.S. population 16 years of age and older at the current cost of 
providing schooling.
  The estimated cost includes both direct expenditures in the private 
and public sectors and an estimate of students' forgone earnings, i.e., 
it reflects the opportunity cost of education. Estimates of students' 
forgone earnings are based on the year-round, full-time earnings of 18-
24 year olds with selected educational attainment levels. These year-
round earnings are reduced by 25 percent because students are usually 
out of school three months of the year. For high school students, these 
adjusted earnings are further reduced by the unemployment rate for 16-17 
year olds; for college students, by the unemployment rate for 20-24 year 
olds. Yearly earnings by age and educational attainment are from Money 
Income in the United States, series P60, published by the Bureau of the 
Census.
  For this presentation, Federal investment in education capital is a 
portion of the Federal outlays included in the conduct of education and 
training. This portion includes direct Federal outlays and grants for 
elementary, secondary, and vocational education and for higher 
education. The data exclude Federal outlays for physical capital at 
educational institutions because these outlays are classified elsewhere 
as investment in physical capital. The data also exclude outlays under 
the GI Bill; outlays for graduate and post-graduate education spending 
in HHS, Defense and Agriculture; and most outlays for vocational 
training.
  Data on investment in education financed from other sources come from 
educational institution reports on the sources of their funds, published 
in U.S. Depart

[[Page 31]]

ment of Education, Digest of Education Statistics.  Nominal expenditures 
were deflated by the implicit price deflator for GDP to convert them to 
constant dollar values. Education capital is assumed not to depreciate, 
but to be retired when a person dies. An education capital stock 
computed using this method with different source data can be found in 
Walter McMahon, ``Relative Returns To Human and Physical Capital in the 
U.S. and Efficient Investment Strategies,'' Economics of Education 
Review, Vol. 10, No. 4, 1991. The method is described in detail in 
Walter McMahon, Investment in Higher Education, Lexington Books, 1974.
  Research and Development Capital: The stock of R&D capital financed by 
the Federal Government was developed from a data base that measures the 
conduct of R&D. The data exclude Federal outlays for physical capital 
used in R&D because such outlays are classified elsewhere as investment 
in federally financed physical capital. Nominal outlays were deflated 
using the GDP deflator to convert them to constant dollar values.
  Federally funded capital stock estimates were prepared using the 
perpetual inventory method in which annual investment flows are 
cumulated to arrive at a capital stock. This stock was adjusted for 
depreciation by assuming an annual rate of depreciation of 10 percent on 
the estimated stock of applied research and development. Basic research 
is assumed not to depreciate. Chapter 6 of this volume contains 
additional details on the estimates of the total federally financed R&D 
stock, as well as its national defense and nondefense components (see 
Budget for Fiscal Year 1993, January 1992, Part Three, pages 39-40).
  A similar method was used to estimate the stock of R&D capital 
financed from sources other than the Federal Government. The component 
financed by universities, colleges, and other nonprofit organizations is 
estimated based on data from the National Science Foundation, Surveys of 
Science Resources. The industry-financed R&D stock component is 
estimated from that source and from the U.S. Department of Labor, The 
Impact of Research and Development on Productivity Growth, Bulletin 
2331, September 1989.
  Experimental estimates of R&D capital stocks have recently been 
prepared by BEA. The results are described in ``A Satellite Account for 
Research and Development,'' Survey of Current Business, November 1994. 
These BEA estimates are lower than those presented here primarily 
because BEA assumes that the stock of basic research depreciates, while 
the estimates in Table 2-4 assume that basic research does not 
depreciate. BEA also assumes a slightly higher rate of depreciation for 
applied research and development, 11 percent, compared with the 10 
percent rate used here.

                            Social Indicators

   The main sources for the data in this table are the Government 
statistical agencies. The data are all publicly available, and can be 
found in such general sources as the annual Economic Report of the 
President and the Statistical Abstract of the United States, or from the 
agencies' Web sites.