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



[[Page 31]]


 
             3. 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 3-1 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. The table 
          provides a comprehensive estimate of the value of the assets 
          actually owned by the Government, but the Government is able 
          to draw on resources in addition to these. It can tax and use 
          other measures to meet future obligations. The liabilities 
          shown in the table include all the binding commitments 
          resulting from prior Government action, but the Government's 
          responsibilities are much broader than this.
    Part II presents possible paths for the Federal budget 
          extending beyond the normal budget window and summarized in 
          Table 3-2. This Part shows the full scope of 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 3-3 summarizes the 
          condition of the Social Security and Medicare trust funds and 
          how that condition changed between 2000 and 2001.
    Part III features information on national economic and 
          social conditions which are affected by what the Government 
          does. Table 3-4 presents summary data for total national 
          wealth, while highlighting the Federal investments that have 
          contributed to that wealth. Table 3-5 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 (FASAB) and adopted for use by the Federal 
Government in September 1993.
---------------------------------------------------------------------------
  \1\ Statement of Federal Financial Accounting Concepts, Number 1, 
Objectives of Federal Financial Reporting, September 2, 1993. 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 is 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 or deficit, does not provide all the 
information needed to analyze the Government's financial and investment 
decisions. While a business is ultimately judged by a single number--the 
bottom line in its balance sheet--for the national Government the 
ultimate test is how its actions affect the country, and that is not 
possible to sum up with a single statistic.

[[Page 32]]

  The data needed to judge the Government's performance go beyond the 
assets its owns or the liabilities that might appear on a balance sheet. 
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 a balance-sheet standpoint, these investments might 
appear to be superfluous or even wasteful, since the Government does not 
own the assets that these investments generate; but such investments can 
make a real contribution to the economy and to people's lives. A 
framework for evaluating Federal finances needs to take into account the 
value of such Federal investments, even when the return they earn does 
not accrue to the Federal Government.

                                     

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     QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''
 
 
------------------------------------------------------------------------
1.   According to Table 3-1, 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 properly 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 successful. The returns on these
                investments show up not as an increase in the Government
                assets but as an increase in the general state of
                knowledge and in the capacity of the country's citizens
                to earn a living. 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 3-1 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.
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. 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. FASAB has also
                developed, and the Government has adopted, a full set
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    QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S ``BALANCE SHEET''--
                                Continued
 
 
------------------------------------------------------------------------
 
               of accounting standards. Federal agencies now issue
 
               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 that 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 3-1?
 
               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--for example. Few
                have suggested counting the future benefits expected
                under these programs as Federal liabilities, yet it
                would be difficult 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 the Government
                programs that do should be accounted for similarly.
 
               Furthermore, if future Social Security benefits were to
                be treated as a liability, logic would suggest that
                future payroll tax receipts that are earmarked to
                finance those benefits ought to be considered an asset.
                Other tax receipts, however, are not counted as
                Government assets, and for good reason. The Government
                does not own the wealth on which its future taxes
                depends. Counting other taxes on the Government's
                balance sheet would be wrong, while treating Social
                Security taxes differently from other taxes would be
                highly questionable.
 
               Under Generally Accepted Accounting Principles (GAAP),
                Social Security is not considered to be a liability, so
                omitting it from Table 3-1 is consistent with the
                accounting standards developed by FASAB.
5.   When the baby-boom generation begins to retire in large numbers
 about ten years from now, the deficit could be larger than it ever was
 before. Should this not be reflected in evaluating the Government's
 financial condition?
 
               The aging of the U.S. population will become dramatically
                evident when the baby-boomers begin to retire, and this
                demographic transition poses serious long-term problems
                for Federal entitlement programs and the budget. The
                second part of this chapter describes how the budget is
                likely to evolve under possible alternative scenarios
                when the baby-boomers retire and beyond. It is clear
                from these projections, and from similar information
                provided by the annual Trustees' Reports for Social
                Security and Medicare, that reforms are needed in these
                programs to meet the long-term challenges.
 
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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
 
               This rule might not actually permit much extra borrowing.
                If the Government were to finance new capital by
                borrowing, it should plan to pay off the debt incurred
                to finance old capital as the capital is used up. The
                net new borrowing permitted by this rule should not
                exceed the amount of net investment after adjusting for
                capital consumption, but as discussed in Chapter 7 of
                Analytical Perspectives, Federal net investment in
                physical capital is usually not very large and on
                occasion has even been negative, so little deficit
                spending would have been justified by this borrowing-for-
                investment criterion, at least in recent years.
 
               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, which
                suggests they should not be included for this purpose
                even though they are an important 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
                of time is no justification for excluding them when
                calculating the surplus or deficit.
 
               Finally, the Federal Government must pursue policies that
                support the overall economic well-being of the Nation
                and its security interests. For such reasons, the
                Government may deem it desirable to run a budget
                surplus, even if this means paying for its own
                investments from current receipts, and there will be
                other times when it is necessary to run a deficit, even
                one that exceeds Government net investment.
                Considerations in addition to the size of Federal
                investment must be weighed in choosing the right level
                of the surplus or deficit.
 
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 long-run fiscal policy, however, an
                alternative to the unified budget has been 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 has relied on annual Social
                Security surpluses to make up for its own shortfall.
 
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  Although it should not be the ending point, a good starting point for 
analysis is Table 3-1, which shows the Government's assets and 
liabilities. This 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 3-1 clearly shows that this has not been correct 
for decades. Government debts are larger than Government assets, 
although in recent years, Government budget surpluses did allow the 
Government to reduce its debt and thereby lower its net liabilities.
  On the liabilities side, Table 3-1 includes only the Government's 
binding obligations--such as Treasury debt and the present discounted 
value of the pensions owed to Federal employees, a form of 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 here with the other Government 
liabilities. Although large in value, these obligations form only a 
subset of the Government's total financial responsibilities.
  The Federal Government also has resources that go beyond the assets 
that would normally appear on a balance sheet, such as those that appear 
in Table 3-1. These other resources include the Government's sovereign 
powers to tax, regulate commerce, and set monetary policy. The best way 
to analyze the limits of all of the Government's fiscal 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, and such changes are a regular part of the 
legislative cycle. For this and other reasons, these programs are not 
Government ``liabilities.'' It is likely, however, that many of these 
programs will remain Federal responsibilities in some form for the 
foreseeable future, and they are projected to continue as such in the 
long-run projections presented in Part II.
  The numbers in the budget and in Table 3-1 are silent on the issue of 
whether the public is receiving value for its tax dollars or whether 
Federal assets are being used effectively. 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. The changes in budgeting practices 
discussed in Chapter 1 will contribute to the long-run goal of more 
complete information about Government programs by permitting a closer 
alignment of the cost of programs with performance measures.
  The presentation that follows consists of a series of tables and 
charts. Taken together, they serve a similar function to a business 
balance sheet. The schematic diagram, Chart 3-1, 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.
    Reading down the left-hand side of Chart 3-1 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.

                                     

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

  Table 3-1 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 2001 dollars. Ever since 1960, Government liabilities have 
exceeded the value of assets (see chart 3-2). 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, and only recently have they regained the level 
they had reached temporarily in 1980.\2\
---------------------------------------------------------------------------
  \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.
---------------------------------------------------------------------------
  Currently, the total real value of Federal assets is estimated to be 
about 35 percent greater than it was in 1960. Meanwhile, Federal 
liabilities have increased by 173 percent in real terms. The decline in 
the Federal net asset position has been principally due to persistent 
Federal budget deficits and the relatively slow increase in Federal 
asset holdings, although other factors have been important in some 
years. For example, the decline from 2000 to 2001 was mainly due to a 
large increase in promised Federal health benefits for military 
retirees. The increase in the discounted present value of these benefits 
was large enough to offset a unified budget surplus and a rise in 
Federal asset values. The shift from budget deficits to budget surpluses 
in the late 1990s reduced Federal net liabilities, which peaked in 1996. 
Currently, the net excess of liabilities over assets is about $3.4 
trillion, or $12,000 per capita, compared with net liabilities of $3.9 
trillion (FY 2001 dollars) and $14,800 per capita (FY 2001 dollars) in 
1995.

[[Page 37]]



                                                     Table 3-1.  GOVERNMENT ASSETS AND LIABILITIES *
                                             (As of the end of the fiscal year, in billions of 2001 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    1960     1965     1970     1975     1980     1985     1990      1995      1999      2000      2001
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
                     ASSETS
 
Financial Assets:
  Cash and Checking Deposits....................       43       62       39       31       48       31        42        43        66        57        51
  Other Monetary Assets.........................        1        1        1        1        2        2         2         1         5         6        12
  Mortgages.....................................       28       27       40       42       77       78       100        68        81        78        75
  Other Loans...................................      102      141      176      176      226      296       209       163       192       191       193
    less Expected Loan Losses...................       -1       -3       -5       -9      -17      -17       -20       -25       -52       -38       -38
  Other Treasury Financial Assets...............       62       77       68       61       86      127       201       241       221       219       232
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................      235      305      319      302      421      517       535       492       512       513       524
 
Nonfinancial Assets:
  Fixed Reproducible Capital:...................    1,019    1,020    1,067      974      865    1,025     1,085     1,125     1,008       979       969
    Defense.....................................      885      842      851      712      608      733       776       793       671       641       621
    Nondefense..................................      134      179      215      261      257      292       309       332       338       338       348
  Inventories...................................      269      233      217      194      240      274       242       171       142       142       142
  Nonreproducible Capital:......................      434      446      428      633    1,014    1,088       857       638       737       943     1,013
    Land........................................       94      131      165      261      333      346       355       265       358       401       426
    Mineral Rights..............................      340      315      263      372      681      742       501       373       379       542       587
                                                 -------------------------------------------------------------------------------------------------------
       Subtotal.................................    1,722    1,699    1,711    1,801    2,119    2,387     2,184     1,934     1,887     2,064     2,124
                                                 =======================================================================================================
      Total Assets..............................    1,957    2,004    2,030    2,103    2,540    2,904     2,718     2,427     2,399     2,577     2,648
 
                   LIABILITIES
 
Financial Liabilities:
  Debt held by the Public.......................    1,150    1,187    1,075    1,094    1,352    2,230     3,043     4,026     3,807     3,490     3,320
  Trade Payables and Miscellaneous..............       34       37       45       59       84      110       160       132       106       104        91
                                                 -------------------------------------------------------------------------------------------------------
     Subtotal...................................    1,184    1,224    1,120    1,153    1,437    2,340     3,203     4,158     3,913     3,594     3,412
 
Insurance Liabilities:
  Deposit Insurance.............................        0        0        0        0        2        9        73         5         1         1         3
  Pension Benefit Guarantee \1\.................        0        0        0       44       32       45        44        21        42        41        51
  Loan Guarantees...............................        0        0        2        7       13       11        16        30        36        38        39
  Other Insurance...............................       32       29       22       20       28       17        20        18        17        16        16
                                                 -------------------------------------------------------------------------------------------------------
     Subtotal...................................       32       29       25       71       75       82       154        74        97        97       109
 
Federal Pension and Retiree Health Liabilities
  Pension Liabilities...........................      810    1,018      969    1,055    1,856    1,839     1,792     1,730     1,730     1,754     1,765
  Retiree Health Insurance Benefits.............      194      244      232      253      445      441       430       415       385       394       786
                                                 -------------------------------------------------------------------------------------------------------
     Total......................................    1,004    1,262    1,201    1,307    2,301    2,280     2,222     2,144     2,115     2,147     2,551
                                                 =======================================================================================================
Total Liabilities...............................    2,220    2,516    2,346    2,531    3,813    4,702     5,579     6,376     6,125     5,837     6,071
 
Balance.........................................     -263     -511     -316     -428   -1,273   -1,797    -2,861    -3,949    -3,726    -3,261    -3,423
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
Addenda:........................................
 
Balance Per Capita (in 2001 dollars)............   -1,461   -2,635   -1,544   -1,983   -5,581   -7,527   -11,431   -14,802   -13,326   -11,527   -11,952
 
Ratio to GDP (in percent).......................    -10.1    -15.6     -8.1     -9.6    -23.9    -28.4     -38.8     -47.6     -38.2     -32.1     -33.5
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* This table shows assets and liabilites 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.

Assets

  Table 3-1 offers 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 $0.5 trillion at the end of FY 2001. Government-held 
mortgages and other loans (measured in constant dollars) reached a peak 
in the late 1980s. Since then, the real 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 $38 billion as of 2001. 
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 have amounted to about $1.0 trillion for most of the last 40 
years (OMB estimate). This capital consists of defense equipment and 
structures, including weapons systems, as well as nondefense capital 
goods. Currently, slightly less than two-thirds of the capital is 
defense equipment or structures. In 1960, defense capital was

[[Page 38]]

about 90 percent of the total. In the 1970s, there was a substantial 
decline in the real value of U.S. defense capital and there was another 
large decline in the 1990s after the end of the Cold War. Meanwhile, 
nondefense Federal capital has increased at an average annual rate of 
around 2-1/2 percent.
  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 would never be sold). Researchers in the private sector 
have estimated what they are worth, however, and these estimates are 
extrapolated in Table 3-1. 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 have 
been on a roller coaster since the mid-1990s. First, they declined 
sharply in 1997-1998 in the wake of the Asian financial crisis, which 
reduced world petroleum demand. In 1999-2000, oil prices rebounded 
sharply, but in 2001 they fell again, although the average for the year 
remained higher than in FY 2000. The fluctuations caused the estimated 
value of Federal mineral deposits to fluctuate as well. (The estimates 
omit some valuable assets owned by the Government, such as works of art 
and historical artefacts, because the valuation for these assets would 
have little realistic basis, and because, as part of the Nation's 
historical heritage, these objects would never be sold.)
  Total Assets: The total real value of Government assets is lower now 
than it was from 1981 through 1992, mainly because of declines in 
defense capital and inventories in the 1990s following the end of the 
Cold War. Government asset values have risen strongly since 1998, 
however, propelled by rising prices for land and energy, and because the 
decline in defense capital has moderated. Even with the decline in their 
estimated value since 1992, the Government's asset holdings are vast. At 
the end of FY 2001, Government assets are estimated to be worth about 
$2.6 trillion.

Liabilities

  Table 3-1 covers all those liabilities that would also appear on a 
business balance sheet, but only those liabilities. These include 
various forms of publicly held 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 $3.4 
trillion at the end of 2001, down from a peak value of $4.2 trillion in 
1996. The single largest component of these liabilities was Federal debt 
held by the public, which amounted to around $3.3 trillion at the end of 
FY 2001. In addition to the debt held by the public, the Government owes 
about $0.1 trillion in miscellaneous liabilities. The publicly held debt 
has been declining for several years, because of the unified budget 
surplus. As the budget returns to deficit, this decline in public debt 
will end, but if the deficits remain small, the ratio of debt and net 
financial liabilities to GDP could continue to shrink.
  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 3-1 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 about $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 a third 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, and there was a large increase in these 
liabilities in 2001. The discounted present value of the benefits is 
estimated to have been around $2.6 trillion at the end of FY 2001 up 
from $2.1 trillion in 2000.\3\ The main reason for the increase was a 
large expansion in Federal military retiree health benefits legislated 
in 2001.
---------------------------------------------------------------------------
  \3\ The pension liability is the actuarial present value of benefits 
accrued-to-date based on past and projected salaries. The 2001 liability 
is extrapolated from recent trends. The retiree health insurance 
liability is based on actuarial calculation of the present vale of 
benefits promised under existing programs. Actuarial estimates are only 
available since 1997. For earlier years the liability was assumed to 
grow in line with the pension liability, and for that reason may differ 
significantly from what the actuaries would have calculated for this 
period.
---------------------------------------------------------------------------

The Balance of Net Liabilities

  The Government need not maintain a positive balance of net assets to 
assure its fiscal solvency, and the buildup in net liabilities since 
1960 did not significantly damage Federal creditworthiness. There are, 
however, limits to how much debt the Government can assume without 
putting its finances in jeopardy. By 1995, Federal net liabilities had 
reached 48 percent of GDP, and although this remained well below the 
limit that would have threatened Federal creditworthiness, the sharp 
upward trend in the ratio of liabilities to GDP, which by 1995 had 
continued for two decades, was ominous.
  Since then, however, there has been a major reduction in the ratio of 
Federal net liabilities to GDP. From 1995 through 2000, the net balance 
as a percentage of GDP fell for five straight years, and it would have 
fallen again in 2001 had there not been a substantial rise in estimated 
health insurance liabilities for Federal retirees last year. This was a 
one-time increase and is not expected to be repeated in future years. 
The ratio of net liabilities to GDP is down by 30 percent from its peak 
level, and the real value--adjusted for inflation--of net liabilities is 
$0.6 trillion (FY 2001 dol

[[Page 39]]

lars) lower than at its peak in FY 1996. The decline in net liabilities 
reflects the shift from budget deficits to surpluses, and a recent 
recovery in some Federal asset prices. As the budget returns to deficit, 
net liabilities are likely to increase again for a time, but if the 
deficits are relatively small and temporary, most of the improvement 
since 1996 ought to be maintained.

                                     


         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 budget horizon. Forecasting 
the economy and the budget so far into the future is highly uncertain. 
Indeed, accurate forecasting is not really possible over such a long 
time period. 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 to name a few. 
The uncertainties increase the further into the future the projections 
extend.
  Given these uncertainties, the best that can be done is to work out 
the implications of expected developments on a ``what if'' basis by 
making explicit assumptions and using the analysis to work out their 
implications. Despite these limitations, long-run budget projections 
constructed under such assumptions can be useful in sounding warnings 
about potential problems. Federal responsibilities extend well beyond 
the next five or ten years, and problems that may be small in that time 
frame can become much larger if allowed time to grow. 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 
that could begin to emerge before the end of this decade. 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, the population over age 62 will 
skyrocket, putting 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.
  The U.S. population has been aging for decades, but a major 
demographic shift is now just over the horizon.

[[Page 40]]

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 temporarily 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 once the 
baby-boomers begin to receive Social Security, and that will begin to 
happen starting in 2008.
  The pressures are expected to persist, however, even after the baby-
boomers are gone. 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 by the time most of the baby-boomers are retired. 
Because of lower fertility and improved mortality that ratio is not 
expected to rise again, even though it is projected to decline very 
little following the passing of the baby-boomers. With fewer workers to 
pay taxes that support the retired population, the budgetary pressures 
on the Federal retirement programs will persist. The problem posed by 
the demographic transition is a permanent one.
  One way to see the extent of the budgetary problem is to examine the 
projected spending on Social Security, Medicare, and Medicaid. 
Currently, these programs account for 47 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 two thirds of non-interest Federal spending. At the 
end of the projection period, the figure rises to almost three-quarters 
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 8 percent of GDP.\4\ By 2040, this 
share almost 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 have to find 
another 10 percent of GDP to cover future benefits in these programs.
---------------------------------------------------------------------------
  \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 2001 dollar 
by about half by 2030, and by two thirds by 2050. For long-run 
comparison, it is much more useful to examine the ratio of 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

[[Page 41]]

Funds have been increasing in size as a result of a large Social 
Security surplus. At the end of FY 2001, the combined Old Age, Survivors 
and Disability Insurance (OASDI) trust funds had reached almost $1.2 
trillion. Under current law, the demographic transition is projected to 
reverse this buildup of the trust funds. 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 even the youngest baby-boomers will be in their late 70s, the 
actuaries project that the OASDI trust funds will be exhausted. That 
would not mean that Social Security benefits would cease, because 
projected taxes would still be large enough to cover over 70 percent of 
projected benefits at that point, but the program could no longer 
sustain promised benefits out of earmarked tax receipts and trust fund 
interest alone (see accompanying box for a fuller discussion).
---------------------------------------------------------------------------
  \5\ The long-ranged projections discussed in this chapter are based on 
an extension of the Administration's economic projections from the 
budget, which differ somewhat from the economic assumptions used by the 
actuaries. Under the extended Administration projections this point 
would be reached a few years later and the other key dates highlighted 
in the Trustee's annual reports would also come somewhat later.
---------------------------------------------------------------------------

                                     

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

                                    Social Security: The Long-Range Challenge
 
 
 
For 66 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.
 
While Social Security is running surpluses today, OMB projects it will begin running cash deficits within 20
 years. Social Security's spending path is unsustainable if the demographic trends toward lower fertility rates
 and longer life spans continue. These trends imply that the number of workers available to support each retiree
 will decline from 3.4 today to an estimated 2.1 in 2030, and that the Government will not be able to meet
 current-law benefit obligations at current payroll tax rates
 
The future 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 is projected to be 1.7 percent of GDP. Under their high-cost assumptions, the shortfall in
 that year would be 76 percent larger, or 3.0 percent of GDP. The program's actuarial deficit, which indicates
 how much the payroll tax rate or benefits as a share of payroll would have to change today to maintain a
 positive balance in the Trust Funds over the next 75 years, was estimated to be -1.9 percent in the latest
 Trustees' report.
 
Long-range uncertainty underscores the importance of creating a system that is financially stable and self-
 contained. Otherwise, if the pessimistic assumptions turn out to be more 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 receive less than a two percent average annual real rate of return on their
 payroll tax contributions. Indeed, such estimates overstate the expected rate of return, because they assume 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 average worker in 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 invest some of the payroll taxes they currently pay in personal retirement
 accounts. The President's Commission to Strengthen Social Security has recently reported on various options
 that would incorporate personal accounts as part of the Social Security framework. The budget discusses in more
 detail the Commission's findings and the options it has presented for discussion.
 
 

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

[[Page 42]]



                                     

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

                                        Medicare: The Long-Range Challenge
 
 
 
According to the Medicare Trustees most recent report issued last March, Medicare spending for the Hospital
 Insurance (HI) program is projected to exceed taxes going into the HI trust fund beginning in 2016, and the
 fund is projected to go bankrupt in 2029. Another way of measuring the expected HI shortfall is by the size of
 the HI trust fund's actuarial deficit, defined as the tax rate increase that would be required today to
 preserve a positive balance in the HI trust fund over the next 75 years. In their March 2001 report, the
 Trustees projected an actuarial deficit of -2.0 percent, a two thirds increase over the 2000 estimate of the
 deficit ,which was -1.2 percent (see Table 3-3). The large adjustment in the actuarial deficit was mainly due
 to the Trustees' acknowledgment that the growth rate of per capita HI expenditures is likely to be faster in
 the long run than had previously been assumed. The new assumption is that per capita HI spending will outpace
 the rate of growth in per capita GDP by a full percentage point. Although that marks a substantial increase in
 the projected growth rate compared with previous Trustees' reports, the difference would still be less than it
 has averaged over the last 20 years.
 
But, Medicare also has a second trust fund for Supplemental Medical Insurance (SMI), and the growth in per
 beneficiary SMI expenditures is also projected to exceed the growth rate of per capita GDP by a full percentage
 point in the latest Trustees' report. A comprehensive analysis of Medicare that takes account of both HI and
 SMI would show that Medicare already runs a deficit with the rest of the budget, not a surplus. Premiums paid
 by SMI beneficiaries fall short of total SMI spending, and the difference exceeds the current HI surplus. In
 fact, over the ten years 2003-2012, Medicare will require transfers from general revenue totaling $1.3
 trillion.
 
The main reason for the projected shortfall in the Medicare Trust Funds is that the long-range projections of
 total Medicare spending show substantial growth. This is partly for demographic reasons. Beginning within ten
 years, the number of Medicare beneficiaries is expected to rise very rapidly, as the baby-boomers reach age 65
 and become eligible for Medicare. Between 2010 and 2030, the number of persons age 65 and older is expected to
 rise from under 40 million to nearly 70 million. Meanwhile, as explained above, per capita spending is also
 expected to continue rising rapidly. Together these factors push up total spending very sharply, as a
 percentage of GDP, Medicare outlays are projected to quadruple increasing from around 2 percent in 2001 to over
 8 percent by 2075. This is the fastest projected growth of any of the major entitlements, faster than both
 Social Security and Medicaid.
The Administration remains committed to working with Congress to reform Medicare in a manner that improves the
 long-run 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 thereafter the HI fund is projected to be 
depleted, and 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, and as Medicare costs rise in the future, the 
subsidy will increase (see accompanying box for a fuller discussion).
  An Uncertain 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.
  Because of the recent economic downturn and needed spending for 
defense and homeland security, the unified budget is now projected to 
return to deficit for a few years. The deficits are not large relative 
to the size of the overall economy, and if budget discipline is 
maintained while the economy recovers as expected, surpluses will return 
thereafter. Furthermore, if the policies and assumptions used for this 
budget are extended, the unified budget could continue in surplus into 
the next decade or even later. Eventually, however, the rising burden of 
entitlement spending will cause deficits to reappear unless there are 
structural reforms in the major entitlement programs. How long before 
these deficits are projected to show up again depends on economic and 
technical factors and policy decisions affecting the rest of the budget. 
Future stress on the budget appears to be unavoidable absent major 
reforms to the entitlement programs.
  There is a wide range of uncertainty around any such long-range 
projections. As discussed further below, the projections are affected by 
many hard-to-foresee eco

[[Page 43]]

nomic and demographic factors, as well as by future policy decisions. In 
the ten years since OMB first began to experiment with such projections, 
the long-run outlook has varied considerably.

                                     


  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 used in preparing this budget augmented by the long-run 
demographic projections from the 2001 Social Security Trustees' Report.
    Inflation, unemployment and interest rates hold stable at 
          2.3 percent per year for CPI inflation, 4.9 percent for the 
          unemployment rate, and 5.3 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 the Administration's 
          medium-term projections--2.1 percent per year. (See chapter 2 
          for more detail on the Administration's economic assumptions).
    In line with the current projections of the Social Security 
          Trustees, U.S. population growth is expected to slow from over 
          1 percent per year in the 1990s to about half that rate by 
          2030, and even less in the decades after 2030.
    The labor force participation rate declines as the 
          population ages and the proportion of retirees in the 
          population is projected to increase.
    Real GDP growth declines gradually after 2011 from 3.1 
          percent per year to an average annual rate of 2.4 percent, 
          reflecting the effects of the projected slowdown in labor 
          force growth combined with the assumed constant rate of 
          productivity growth.
  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.--These long-run projections generally 
assume that mandatory spending proceeds according to current law and 
that the policy proposals in the budget are adopted without assuming any 
other new programs or enhancements to existing programs. For the reasons 
discussed above, these assumptions imply that the major entitlement 
programs are projected to absorb an increasing share of budget 
resources. This is true under all likely assumptions re

[[Page 44]]

garding future discretionary spending. Chart 3-5 shows budget 
projections under the two main alternative assumptions that OMB has used 
in projecting discretionary spending: one holds discretionary spending 
constant in real dollars allowing it to increase only with the rate of 
inflation while the other holds discretionary spending constant in 
relation to GDP, which means it expands at the same rate over time as 
GDP is projected to grow.
    Social Security benefits, driven by the retirement of the 
          baby-boom generation, rise from 4.2 percent of GDP in 2001 to 
          6.4 percent in 2040. They continue to rise after that but more 
          gradually, eventually reaching 6.9 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 expand quite rapidly, rising from 2.1 
          percent of GDP in 2001 to 4.8 percent of GDP in 2040, and 7.7 
          percent by 2075.
    Federal Medicaid spending goes up from 1.3 percent of GDP in 
          2001 to 2.7 percent in 2040 and to 3.6 percent of GDP in 2075.
    Holding discretionary spending constant in real dollars 
          implies that it declines relative to GDP from 6.5 percent in 
          2001 to 3.7 percent in 2040, and to 2.1 percent in 2075. 
          Alternatively, if discretionary spending is fixed as a share 
          of GDP at the level reached in 2012, it maintains a constant 
          5.8 percent share of GDP through 2075.

                                     

                                     



[[Page 45]]



                          Table 3-2.  LONG-RUN BUDGET PROJECTIONS OF 2003 BUDGET POLICY
                                                (Percent of GDP)
----------------------------------------------------------------------------------------------------------------
                                                   2000    2005    2010    2020    2030    2040    2050    2075
----------------------------------------------------------------------------------------------------------------
Discretionary Grows with GDP
  Receipts......................................    20.8    19.2    19.2    19.2    19.4    19.4    19.6    19.6
   Outlays......................................    18.4    18.7    18.0    18.4    20.4    22.3    24.3    32.7
     Discretionary..............................     6.3     6.9     6.2     5.8     5.8     5.8     5.8     5.8
     Mandatory..................................     9.8    10.3    10.7    12.5    14.4    15.6    16.5    19.8
       Social Security..........................     4.2     4.2     4.4     5.4     6.3     6.4     6.4     6.9
       Medicare.................................     2.0     2.1     2.3     2.9     3.9     4.8     5.5     7.7
       Medicaid.................................     1.2     1.5     1.8     2.2     2.4     2.7     3.0     3.6
       Other....................................     2.4     2.4     2.3     2.0     1.8     1.7     1.6     1.5
     Net Interest...............................     2.3     1.6     1.1     0.1     0.2     0.9     2.0     7.1
   Surplus or Deficit (-).......................     2.4     0.5     1.2     0.8    -1.1    -2.9    -4.8   -13.2
   Primary Surplus or Deficit (-)...............     4.7     2.1     2.2     0.9    -0.9    -2.0    -2.8    -6.1
   Federal Debt Held by the Public..............    35.0    29.2    19.1     2.9     4.4    20.9    46.5   165.2
Discretionary Spending Grows with Inflation
   Receipts.....................................    20.8    19.2    19.2    19.2    19.4    19.4    19.6    19.6
   Outlays......................................    18.4    18.7    18.0    17.6    18.3    18.7    19.0    22.5
     Discretionary..............................     6.3     6.9     6.2     5.1     4.3     3.7     3.1     2.1
     Mandatory..................................     9.8    10.3    10.7    12.5    14.5    15.6    16.5    19.9
       Social Security..........................     4.2     4.2     4.4     5.4     6.3     6.4     6.4     6.9
       Medicare.................................     2.0     2.1     2.3     2.9     3.9     4.8     5.5     7.7
       Medicaid.................................     1.2     1.5     1.8     2.2     2.4     2.7     3.0     3.6
       Other....................................     2.4     2.4     2.3     2.0     1.8     1.7     1.7     1.6
     Net Interest...............................     2.3     1.6     1.1     0.0    -0.5    -0.6    -0.6     0.5
   Surplus or Deficit (-).......................     2.4     0.5     1.2     1.7     1.1     0.8     0.5    -2.9
   Primary Surplus or Deficit (-)...............     4.7     2.1     2.2     1.7     0.6     0.2    -0.1    -2.4
   Federal Debt Held by the Public..............    35.0    29.2    19.1    -0.5   -10.9   -13.9   -14.6    12.8
----------------------------------------------------------------------------------------------------------------

  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: The long-range projections for Medicare follow the 
latest projections of the Medicare actuaries from the 2001 Medicare 
Trustees' Report. For many years, the Trustees' projections included a 
long-run slowdown in the rate of growth of real per capita Medicare 
spending. Recently, the Technical Review Panel on the Medicare Trustees' 
Reports recommended raising the long-run projected growth rate in real 
per capita Medicare costs, so that ``age-and gender-adjusted, per-
beneficiary spending growth exceeds the growth of per-capita GDP by 1 
percentage point per year.'' \7\ This assumption was adopted in the 2001 
Medicare Trustees' Reports, and in Chart 3-5, real per capita Medicare 
benefits are assumed to rise at this rate. The effect of this change in 
assumptions on the Medicare HI trust fund's actuarial deficiency is 
shown in Table 3-3.
---------------------------------------------------------------------------
  \7\ Technical Review Panel on the Medical 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 to 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 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 have been made for discretionary spending. 
Holding discretionary spending unchanged in real terms is the ``current 
services'' assumption often used for budget projections when there is no 
legislative guidance on future spending levels. Alternatively, if 
discretionary spending is assumed to keep pace with the growth in GDP, 
spending increases in real terms whenever there is positive real 
economic growth.
  Under the assumption that future spending expands with the size of the 
economy, these long-run budget projections show clearly that the budget 
is on an unsustainable path, although the shortfall unfolds only 
gradually. For most of the next two decades, the budget is projected to 
be in surplus, between 0 and 1-1/2 percent of GDP. In the following 
decade, the budget returns to deficit, and in the decade 2030-2039, the 
deficit begins to rise sharply. This is the time span within which the 
actuaries are now projecting that the Social Security trust funds will 
be exhausted. Timely action now could resolve these problems, without 
disrupting the retirement plans of future generations of workers.

[[Page 46]]

  3. Productivity: The future rate of productivity growth is perhaps the 
most powerful of the assumptions affecting the long-run budget outlook, 
and it is especially uncertain. 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 which had 
many profound consequences for society. This slowdown in income growth 
also contributed to worsening Federal budget outcomes that followed 
1973. In the latter half of the 1990s, however, productivity growth 
increased, unexpectedly again, although reasons for the revival are 
clear in hindsight.
  Since the end of 1995, labor productivity in the economy's nonfarm 
business sector has grown at an annual rate of 2.4 percent, a full 
percentage point faster than the growth rate from 1973 through 1995, 
although the latest data, which were revised last summer, show that the 
trend growth rate remains about half a percentage point slower than from 
1948 though 1973. So, productivity growth has rebounded, but it has not 
completely recovered from the post-1973 slowdown. On the other hand, 
while the latest downturn in the economy has cut into productivity 
growth, the underlying trend remains strong, which means there is reason 
to hope the improvement in productivity marks a permanent change.
  The revival of productivity growth is one of the most welcome 
developments of the last several years. From a budgetary standpoint, a 
higher rate of economic growth makes the task of reaching a balanced 
budget much easier, while a lower productivity growth rate has the 
opposite effect. Although the long-run growth rate of productivity is 
inherently uncertain, it has averaged around 2 percent per year since 
1947. In these extended projections, real GDP per hour is assumed to 
grow at 2.1 percent per year.
  4. Population: The key assumptions underlying the long-run demographic 
projections concern fertility, immigration, and mortality.
    The demographic projections assume that fertility will 
          average around 1.9 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 and 
          means that total population continues to expand throughout the 
          projection period, although at a slower rate than 
          historically.
    Mortality is projected to decline. The average female 
          lifespan is projected to rise from 79.6 years to 85.0 years by 
          2075, and the average male lifespan is projected to increase 
          from 74.0 years in 2001 to 80.9 years by 2075, and the gap 
          between men's and women's expected lifespans narrows somewhat. 
          A technical panel to the Social Security Trustees recently 
          reported that the improvement in longevity might even be 
          greater than this. If so, the projected growth of the three 
          big entitlement programs would be even faster.

  Conclusion.--Since the early 1990s, the long-run budget outlook has 
improved significantly, but it remains highly uncertain. Currently, 
there is an extended period of budget surpluses under most projection 
assumptions, but how big the surpluses will be and how long they will 
last remain quite uncertain. Furthermore, these surpluses eventually end 
under most assumptions. With pessimistic assumptions, the fiscal picture 
deteriorates relatively soon. More optimistic assumptions imply a longer 
period before the inexorable pressures of rising entitlement spending 
overwhelm the budget. Fundamental reforms are needed to preserve the 
basic promises embodied in Social Security and Medicare. Meanwhile, the 
wide range of possible outcomes highlights the sensitivity of these 
long-term projections to specific assumptions and cautions against undue 
reliance on any particular projection path. While actual experience with 
these projections is too short to have provided a meaningful track 
record to judge their accuracy, the shifts from one budget to the next 
in the featured projection path offer one indication of the wide range 
of variation in reasonable outcomes (see chart 3-4).

   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 2012. Despite 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 3-3 shows the changes in the 75-year 
actuarial balances of the Social Security and Medicare HI trust funds 
from 2000 to 2001. There was virtually no change in the consolidated 
OASDI trust fund's projected deficiency. It narrowed slightly from -1.89 
percent of payroll to

[[Page 47]]

-1.86 percent. There was a large change in the actuarial balance of the 
HI trust fund.
  The changes were due to revisions in the actuarial assumptions and to 
the annual shift in the valuation period, which arises because with the 
passage of time one more year of projected deficits has moved into the 
75-year window. In the case of the OASDI funds, a small improvement in 
the economic assumptions was offset by the shift in the valuation 
period. For the HI program, the Trustees adopted the recommendation of 
their technical panel and increased the growth rate projected for the 
program's real per capita benefits. This change in assumptions brings 
projected future growth more in line with past patterns of growth, but 
if the new assumption is realized it will seriously undermine the 
program's long-term financial status.

                                     

 Table 3-3.  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 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.................................
------------------------------------------------------------------------

                                     

                  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 its taxes, but they are 
not owned by the Federal Government and would not show up on a 
conventional balance sheet for the Federal Government. It is true, of 
course, that by encouraging economic growth in the private sector, the 
Government augments future Federal tax receipts; when the private 
economy expands, the Government collects more taxes. However, if the 
investments funded, but not owned by the Federal Government, earn a 
conventional economic rate of return, the fraction of that return that 
comes back to the Government in higher taxes is far less than what a 
private investor would require before undertaking a similar investment.
  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 typical balance sheet as a Government asset, even though 
these investments may contribute to future tax receipts.
  To show the importance of these kinds of issues, Table 3-4 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 more 
than $5 trillion. The Federal contribution is down from around 9 percent 
in the mid-1980s, and from around 11 percent in 1960. Much of this 
reflects the shrinking size of defense capital stocks, which have 
declined from around 12 percent of GDP to 7 percent since the end of the 
Cold War.

[[Page 48]]



                                                               Table 3-4.  NATIONAL WEALTH
                                            (As of the end of the fiscal year, in trillions of 2001 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1960    1965    1970    1975    1980    1985    1990    1995    1999    2000    2001
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
                             ASSETS
 
Publicly Owned Physical Assets:
 
  Structures and Equipment......................................     2.0     2.3     2.8     3.5     3.6     3.9     4.2     4.7     5.1     5.3     5.2
     Federally Owned or Financed................................     1.2     1.2     1.4     1.5     1.4     1.7     1.8     2.0     2.0     1.9     2.0
       Federally Owned..........................................     1.0     1.0     1.1     1.0     0.9     1.0     1.1     1.1     1.0     1.0     1.0
       Grants to State & Local Govt's...........................     0.1     0.2     0.3     0.5     0.5     0.7     0.8     0.8     0.9     1.0     1.0
     Funded by State & Local Govt's.............................     0.9     1.1     1.5     2.0     2.2     2.1     2.4     2.7     3.2     3.3     3.2
   Other Federal Assets.........................................     0.7     0.7     0.6     0.8     1.3     1.4     1.1     0.8     0.9     1.1     1.2
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     2.7     3.0     3.5     4.3     4.9     5.2     5.3     5.5     6.0     6.4     6.4
Privately Owned Physical Assets:
   Reproducible Assets..........................................     7.0     8.1     9.9    12.6    16.4    17.3    19.6    21.4    24.6    25.6    26.4
     Residential Structures.....................................     2.7     3.2     3.7     4.8     6.6     6.8     7.7     8.6    10.1    10.5    11.0
     Nonresidential Plant & Equipment...........................     2.8     3.2     4.0     5.3     6.8     7.4     8.3     9.0    10.3    10.8    11.1
     Inventories................................................     0.6     0.7     0.8     1.1     1.3     1.2     1.3     1.4     1.5     1.5     1.4
     Consumer Durables..........................................     0.9     1.0     1.3     1.5     1.7     1.9     2.3     2.4     2.7     2.8     2.9
   Land.........................................................     2.0     2.4     2.8     3.7     5.6     6.4     6.5     4.9     6.6     7.4     7.8
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     9.1    10.5    12.7    16.3    22.0    23.7    26.1    26.2    31.1    33.0    34.3
Education Capital:
   Federally Financed...........................................     0.1     0.1     0.2     0.3     0.5     0.6     0.8     0.9     1.1     1.1     1.2
   Financed from Other Sources..................................     6.1     7.8    10.6    13.1    17.1    20.4    26.3    29.0    35.1    36.6    37.9
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     6.2     7.9    10.8    13.4    17.5    21.0    27.1    29.8    36.2    37.7    39.1
Research and Development Capital:
   Federally Financed R&D:......................................     0.2     0.3     0.5     0.5     0.6     0.7     0.8     0.9     1.0     1.0     1.0
   R&D Financed from Other Sources..............................     0.1     0.2     0.3     0.4     0.5     0.7     0.9     1.1     1.4     1.5     1.4
                                                                 ---------------------------------------------------------------------------------------
     Subtotal...................................................     0.3     0.5     0.8     0.9     1.1     1.3     1.7     2.0     2.4     2.5     2.4
                                                                 =======================================================================================
Total Assets....................................................    18.3    21.9    27.8    34.9    45.5    51.3    60.2    63.6    75.7    79.5    82.1
Net Claims of Foreigners on U.S. (+)............................    -0.1    -0.2    -0.2    -0.1    -0.4     0.0     0.8     1.5     3.5     3.5     3.5
Net Wealth......................................................    18.4    22.1    27.9    35.0    45.8    51.2    59.4    62.0    72.2    76.0    78.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADDENDA:........................................................
 Per Capita Wealth (thousands of dollars).......................   101.9   114.0   136.4   162.4   200.9   214.5   237.1   232.5   258.3   268.6   274.6
 Ratio of Wealth to GDP (in percent)............................   703.3   715.3   695.0   695.6   678.8   673.6   662.6   682.8   677.3   689.1   711.2
 Total Federally Funded Capital (trillions 2001 $)..............     2.1     2.4     2.7     3.2     3.7     4.3     4.5     4.5     4.9     5.1     5.3
 Percent of National Wealth.....................................    11.4    10.7     9.8     9.1     8.1     8.5     7.6     7.3     6.8     6.8     6.7
--------------------------------------------------------------------------------------------------------------------------------------------------------

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 $41 trillion in 2001, 
consisting of $34 trillion in private physical capital and $6 trillion 
in public physical capital; by comparison, GDP was about 10 trillion in 
2001.
  The Federal Government's contribution to this stock of capital 
includes its own physical assets plus $1.1 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 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 
$39 trillion in 2001, 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 proposed. 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 in

[[Page 49]]

come, 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, which is why they are referred 
to as education capital rather than human capital. They are that part of 
human capital that can be attributed to 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 $2-1/2 trillion in 2001. Although this represents 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 another cancel out. In most cases, the 
debts of one American are the assets of another American, so in these 
cases, the debts are not included in Table 3-4 because they are not a 
net liability of Americans as a Nation. Table 3-4 is intended to show 
National totals only, but that does not mean that the level of debt is 
unimportant. The amount of debt owed by Americans to other Americans can 
exert both positive and negative effects on the economy. American's 
willingness to borrow helped fuel the expansion of the 1990s, but the 
debts accumulated in this process must be serviced, which could lead to 
curtailed spending at some future point. Moreover, bad debts, which are 
not collectible, can cause serious problems for the banking system. 
While the banking system appears to be financially sound, such 
uncollectible debts were a serious problem hampering the opening stages 
of the last economic expansion in 1991-1992. Despite these 
considerations, the only debts that appear in Table 3-4 are the debts 
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. Although the current account deficit has been at 
record levels recently, the size of this debt remains small compared 
with the total stock of U.S. assets. It amounted to 3-1/2 percent of 
total assets in 2001.
  Federal debt does not appear explicitly in Table 3-4 because much of 
it is held by Americans; only that portion of the Federal debt held by 
foreigners is included with other debt to foreigners. Comparing the 
Federal Government's net liabilities with total national wealth does, 
however, provide another indication of the relative magnitude of the 
imbalance in the Government's accounts. Currently, Federal net 
liabilities, as reported in Table 3-1, amount to about 4 percent of net 
U.S. wealth as shown in Table 3-4.

                        Trends in National Wealth

  The net stock of wealth in the United States at the end of FY 2001 was 
about $78-1/2 trillion, almost eight times the level of GDP. Since 1981, 
it has increased in real terms at an average annual rate of 2.6 percent 
per year--two percentage points less rapidly than it grew from 1961 to 
1981--4.7 percent per year. Public physical capital formation growth 
slowed even more. Since 1981, public physical capital has increased at 
an annual rate of only 1.0 percent, compared with 3.3 percent over the 
previous 20 years.
  The net stock of private nonresidential plant and equipment grew 2.3 
percent per year from 1981 to 2001, compared with 4.6 percent in the 
1960s and 1970s; and the stock of business inventories increased even 
less, just 0.4 percent per year on average since 1981. However, private 
nonresidential fixed capital has increased much more rapidly since 
1995--3.8 percent per year--reflecting the investment boom in the latter 
half of the 1990s.
  The accumulation of education capital, as measured here, has also 
slowed down since 1981, but not as much. It grew at an average rate of 
5.3 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 1981, education capital has grown at a 3.9 
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 also grown at about 3.9 
percent per year since 1981.

               Other Federal Influences on Economic Growth

  Federal investment decisions, as reflected in Table 3-4, 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 including sound economic growth, promoting health and social 
welfare, and protecting the environment. Table 3-5 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.

                                                                           Table 3-5.  ECONOMIC AND SOCIAL INDICATORS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
       General categories                              Specific measures                         1960     1965     1970     1975     1980     1985     1990     1995     1999     2000     2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
  Living Standards..............  Real GDP per person (1996 dollars).........................  $13,145  $15,587  $17,445  $18,909  $21,523  $23,971  $26,832  $28,318  $31,732  $32,651  $32,572
                                  average annual percent change (5-year trend)...............      0.7      3.5      2.3      1.6      2.6      2.2      2.3      1.1      2.6      2.9      2.4
                                  Median Income (2000 dollars):
                                    All Households...........................................      N/A      N/A  $33,746  $33,489  $35,238  $36,246  $38,446  $38,262  $42,187  $42,148      N/A
                                    Married Couple Families..................................  $29,111  $33,881  $40,631  $42,193  $46,045  $47,728  $51,224  $52,843  $58,580  $59,187      N/A
                                    Female Householder, Husband Absent.......................  $14,712  $16,472  $19,678  $19,423  $20,709  $20,964  $21,740  $22,110  $24,529  $25,787      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     29.6      N/A
                                    Poverty Rate (%) (a).....................................     22.2     17.3     12.6     12.3     13.0     14.0     13.5     13.8     11.8     11.3      N/A
  Economic Security.............  Civilian Unemployment (%)..................................      5.5      4.5      4.9      8.5      7.1      7.2      5.5      5.6      4.2      4.0      4.8
                                  CPI-U (% Change)...........................................      1.7      1.6      5.8      9.1     13.5      3.5      5.4      2.8      2.1      3.4      2.9
 
  Employment....................  Increase in Total Payroll Employment Previous 12 Months....     -0.5      2.9     -0.5      0.4      0.2      2.5      0.3      2.2      3.1      2.0     -1.1
                                  Managerial or Professional Jobs (% of civilian employment).      N/A      N/A      N/A      N/A      N/A     24.1     25.8     28.3     30.3     30.2     31.0
 Wealth Creation................  Net National Saving Rate (% of GDP)........................     10.2     12.1      8.2      6.6      7.5      6.1      4.6      4.7      6.0      5.6      4.0
 
  Innovation....................  Patents Issued to U.S. Residents (thousands)...............     42.3     54.1     50.6     51.5     41.7     45.1     56.1     68.2     99.5    103.6      N/A
                                  Multifactor Productivity (average annual percent change)...      0.8      2.8      0.8      1.1      0.8      0.6      0.5      0.6      1.0      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   24,170   25,051   25,393      N/A      N/A
                                  Sulfur Dioxide Emissions (thousand short tons).............   22,227   26,750   31,161   28,011   25,905   23,658   23,678   19,188   18,867      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     22.4     21.7      N/A
 
  Safe Communities..............  Violent Crime Rate (per 100,000 population) (b)............      160      199      364      482      597      557      732      685      523      506      N/A
                                  Murder Rate (per 100,000 population) (b)...................        5        5        8       10       10        8        9        8        6        6      N/A
                                  Murders (per 100,000 Persons Age 14 to 17).................      N/A      N/A      N/A        5        6        5       10       11        6      N/A      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      7.1      6.9      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     76.9      N/A
                                  Cigarette Smokers (% population 18 and older)..............      N/A     41.9     39.2     36.3     33.0     29.9     25.3     24.6     23.3      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     83.4      N/A      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     25.2      N/A      N/A
                                  National Assessment of Educational Progress (c)
                                    Mathematics High School Seniors..........................      N/A      N/A      N/A      302      299      301      305      307      308      N/A      N/A
                                    Science High School Seniors..............................      N/A      N/A      305      293      286      288      290      295      295      N/A      N/A
 
  Participation.................  Individual Charitable Giving per Capita (2000 dollars).....      231      277      333      353      385      396      439      416      553      554      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    51.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
N/A = Not Available.
 
(a) The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
 
(b) Not all crimes are reported, and the fraction that go unreported may have varied over time, 2000 data are preliminary.
 
(c) Some data from the national educational assessments have been interpolated.

  The indicators shown here are a limited subset drawn from the vast 
array of available data on conditions in

[[Page 50]]

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 trends in these 
indicators turned around. The improvement in economic conditions has 
been widely noted, and there have also been some significant social 
improvements. Perhaps, most notable has been the turnaround in the crime 
rate. Since reaching a peak

[[Page 51]]

in the early 1990s, the violent crime rate has fallen by a third. The 
turnaround has been especially dramatic in the murder rate, which was 
lower in 2000 than at any time since the 1960s. The recession that began 
in March 2001 is having an effect on some of these indicators already, 
and could affect others when data become available later this year. 
Unemployment has risen and real GDP growth has declined. But if the 
recession is brief, which is the expectation for this budget, much of 
the improvement shown in Table 3-5 is likely to be preserved.

An Interactive Analytical Framework

  No single framework can encompass all of the factors that affect the 
financial condition of the Federal Government. 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 from 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. The source data are in 
current dollars. To estimate investment flows in constant dollars, it 
was necessary to deflate the nominal investment series. This was done 
using price deflators for Federal investment from the National Income 
and Product Accounts.
  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 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 1979-1998, 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 2001 is a 
projection. The health insurance liability was estimated by the program 
actuaries for 1997-2001, 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 2002-2012, 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 2001 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: 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 is prepared, repriced using Administration inflation 
assumptions. Medicaid outlays are based on the economic and demographic 
projections in the model. Medicare projections follow the latest 
Medicare Trustees' reports adjusted for the Administration's different 
inflation and real growth assumptions. Other entitlement programs are 
projected based on rules of thumb linking program

[[Page 52]]

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 7. 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 2001.
  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 2001 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. Department 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 price index 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 7 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.
  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 3-4 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 
agencies' Web sites.