[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.
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\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.
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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.
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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''
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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
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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
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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\
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\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.
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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.
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Table 3-1. GOVERNMENT ASSETS AND LIABILITIES *
(As of the end of the fiscal year, in billions of 2001 dollars)
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1960 1965 1970 1975 1980 1985 1990 1995 1999 2000 2001
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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
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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
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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
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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
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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
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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
��������������������������������������������������������������������������������������������������������������������������������������������������������
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
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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.
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\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.
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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.