[Analytical Perspectives]
[Economic Assumptions and Analyses]
[12. Stewardship]
[From the U.S. Government Printing Office, www.gpo.gov]
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12. STEWARDSHIP
Introduction
The budget is an essential tool for allocating resources within the
Federal Government and between the public and private sectors; but
current outlays, receipts, and the surplus or deficit do not provide
enough information to evaluate fully the Government's financial and
investment decisions. Indeed, changes in the annual budget deficit or
surplus can be misleading indicators of the Government's financial
condition. For example, the temporary shift from annual deficit to
surplus in the late 1990s did nothing to correct the long-term
deficiencies in the Nation's major entitlement programs, which are the
major source of the long-run shortfall in Federal finances. This would
have been more apparent if greater attention had focused on long-term
measures such as appear in this chapter. As important as the current
budget surplus or deficit is, other indicators are also needed to
properly judge the Government's fiscal condition.
For the Federal Government, there is no single number that corresponds
to the bottom line in a business balance sheet or income statement. The
Government is ultimately judged by how its actions affect the country's
security and well-being, and that cannot be summed up with a single
statistic. Although its financial condition is important, the Government
does not and is not expected to earn a profit. Instead, its fiscal
status is best evaluated using a broad range of data and several
complementary perspectives. This chapter presents a framework for such
analysis. Because there are serious limitations on the available data
and the future is uncertain, this chapter's findings should be
interpreted with caution; its conclusions are subject to future
revision.
The chapter consists of four parts:
Part I explains how the separate pieces of analysis link
together. Chart 12-1 presents the linkages in a schematic
diagram.
Part II presents the Government's physical and financial
assets and its legal liabilities, which are all collected in
Table 12-1. This table is similar to a business balance sheet,
but for that reason it misses some of the Government's unique
fiscal characteristics. That is why it needs to be
supplemented by information in Parts III and IV.
Part III shows possible paths for the Federal budget
extending well beyond the normal budget window and describes
how these projections vary depending on key economic and
demographic assumptions. The projections are summarized in
Table 12-2 and in a related set of charts. This part also
presents discounted present value estimates of the funding
shortfall in Social Security and Medicare in Table 12-3.
Together such data indicate the full range of the Government's
future responsibilities and resources under current law and
policy. In particular, they show the looming challenge that
Federal entitlement programs create for the budget in the long
run.
Part IV returns the focus to the present. It features
information on national economic and social conditions that
are affected by what the Government does. The private economy
is the ultimate source of the Government's resources. Table
12-4 presents summary data for total national wealth, while
highlighting the Federal investments that have contributed to
that wealth. Table 12-5 presents a small sample of economic
and social indicators.
PART I--HOW TO EVALUATE FEDERAL FINANCES
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 that goes beyond the standard measures of outlays,
receipts and the surplus/deficit. It includes information that would
appear on a balance sheet, but it goes beyond that to include long-run
projections of the budget that can be used to show where future fiscal
strains are most likely to appear. It also includes measures that
indicate some of what society has gained economically and socially from
Federal programs funded through this and past budgets.
The Government's legally binding obligations--its liabilities--consist
in the first place of Treasury debt owed to the public. Other
liabilities include the pensions and other benefits owed to retired
Federal employees and veterans. These employee obligations are a form of
deferred compensation; they have counterparts in the business world, and
would appear as liabilities 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. These Government liabilities are
discussed further in Part II along with the Government's assets. They
are collected in Table 12-1. Although they are important, the
obligations shown in Table 12-1 are only a subset
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of the Government's total financial responsibilities. Indeed, the full
extent of the Government's fiscal exposure through its various
programmatic commitments dwarfs the outstanding debt held by the public
or even the total of all acknowledged Federal liabilities. The
commitment to Social Security and Medicare alone amounts to many times
the value of outstanding Federal debt.
In addition to Social Security and Medicare, the Government has a
broad range of programs that dispense cash and other benefits to
individual recipients. It also provides a wide range of other public
services that must be financed through the tax system. The Government is
not constitutionally obligated to continue operating any of these
programs without change, and specific benefits and services may be
modified or even ended at any time, subject to the decisions of Congress
and the President. Indeed, such changes are a regular part of the
legislative cycle. For such reasons, these programmatic commitments are
not ``liabilities'' in a legal or accounting sense, and they would not
appear on a balance sheet, but they remain Federal responsibilities and
will have a claim `on budgetary resources for the foreseeable future.
All of these programs are reflected in the long-run budget projections
in Part III. It would be misleading to leave out any of these
programmatic commitments in projecting future claims on the Government
or in calculating the Government's long-run fiscal balance.
The Federal Government also has resources that go beyond the assets
that would appear on a business's balance sheet. These additional
resources include most importantly the Government's sovereign power to
tax. Because of these additional responsibilities and resources, the
best way to analyze the future strains on the Government's fiscal
position is to make a long-run projection of the entire Federal budget,
as is done in Part III of this chapter, which provides a comprehensive
measure of the Government's future cash flows.
Over long periods of time, the spending the Government does must be
financed by the taxes and other receipts it collects. Although the
Government can borrow for temporary periods, it must pay interest on any
such borrowing, which adds to future spending. In the long run, under
normal financial conditions, a solvent Government must pay for its
spending out of its receipts. The projections in Part III show that
under an extension of the estimates in this budget, long-run balance in
this sense is not achieved, mostly because projected spending for Social
Security, Medicare, and Medicaid grow faster than the revenue available
to pay for them.
The long run budget projections and the table of assets and
liabilities are silent on the question of whether the public is
receiving value for its tax dollars or whether Federal assets are being
used effectively. Information on those points requires performance
measures for Government programs supplemented by appropriate information
about conditions in the economy and society. Recent changes in budgeting
practices will contribute to the goal of more complete information about
Government programs and permit a closer alignment of the cost of
programs with performance measures. These changes are described in
detail in the main Budget volume itself, in chapter 2 of this volume,
and in the accompanying material that describes results obtained with
the Program Assessment Rating Tool (PART). This Stewardship chapter
complements the detailed exploration of Government performance with an
assessment of the overall impact of Federal policy as reflected in some
general measures of economic and social well-being.
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, operting 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. It is especially intended to
meet the broad interests of economists and others in evaluating trends
over time, including both past and future trends. The annual Financial
Report of the United States Government presents related information, but
from a different perspective. The Financial Report includes a standard
business-type balance sheet. The assets and liabilities on that balance
sheet are all based on transactions that have already occurred. A
somewhat similar table can be found in Part II of this chapter. The
Report also includes a Statement of Social Insurance and it reviews a
substantial body of information on the condition and sustainability of
the Government's social insurance programs. However, the Report does not
try to extend that review to the condition or sustainability of the
Government as a whole, which is the main focus of this chapter.
Connecting the Dots: The presentation that follows consists in large
part of a series of tables and charts. Taken together, they serve
similar functions to a business's balance sheet. The schematic diagram,
Chart 12-1, shows how the different pieces fit together. The tables and
charts should be viewed as an ensemble, the main elements of which are
grouped in two broad
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categories--assets/resources and liabilities/responsibilities.
Reading down the left-hand side of Chart 12-1 shows the
range of Federal resources, including assets the Government
owns, tax receipts it can expect to collect based on current
and proposed law, 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 that maintain present policies and
trends. This column ends with a set of indicators highlighting
areas where Government activity affects society or the
economy.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S STEWARDSHIP
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1. According to Table 12-1, 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.
For example, the Federal Government invests in education
and research. The Government earns no direct return from
these investments; but 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 and
lead a fuller life. 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 12-1 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 actually owned by the Federal Government. The
Government, however, 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 current
assets are less than its current liabilities.
The financial markets clearly recognize this reality. The
Federal Government's implicit credit rating is the best
in the world; 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.
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S STEWARDSHIP
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3. Why are Social Security and Medicare not shown as Government
liabilities in Table 12-1?
Future Social Security and Medicare benefits may be
considered as promises or responsibilities of the
Federal Government, but these benefits are not a
liability in a legal or accounting sense. The Government
has unilaterally decreased as well as increased these
benefits in the past, and future reforms could alter
them again. These benefits are not ignored in this
presentation of the Government's finances, but they are
shown elsewhere than in Table 12-1. They appear in two
ways: Budget projections as a percent of GDP from now
through 2080, in Table 12-2, and the actuarial
deficiency estimates over roughly the same period in
Table 12-3.
Other Federal programs exist that are similar to Social
Security and Medicare in the promises they make--
Medicaid--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 or Medicare were to be classified as a
liability. There is no bright line dividing Social
Security and Medicare from other programs that promise
benefits to people, and all the Government programs that
do so should be accounted for similarly.
Furthermore, if future Social Security or Medicare
benefits were to be treated as a liability, then future
payroll tax receipts earmarked to finance those benefits
ought to be treated as a Government asset. This
treatment would be essential to correctly gauge the
future claim. Tax receipts, however, are not generally
considered Government assets, and for good reason: the
Government does not own the wealth on which future taxes
depends. Including taxes on the balance sheet would be
wrong for this reason, but without counting taxes the
balance sheet would overstate the drain on net assets
from Social Security and Medicare. Furthermore, treating
taxes for Social Security or Medicare differently from
other taxes would be highly questionable.
Finally, under Generally Accepted Accounting Principles
(GAAP), Social Security is not considered to be a
liability, so not counting it as such in this chapter is
consistent with the accounting standards.
4. Why can't the Government keep a better 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 naively to the
Government. The Government does not have a ``bottom
line'' comparable to that of a business corporation, but
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 many of 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 of accounting standards. Federal
agencies now issue audited financial reports that follow
these standards and an audited Government-wide financial
report is issued as well. In short, the Federal
Government does follow generally accepted accounting
principles (GAAP) just as businesses and State and local
governments do for their activities, although the
relevant principles differ depending on the
circumstances. 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.''
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QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S STEWARDSHIP
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5. When the baby-boom generation begins to retire in large numbers
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. Both
the long-range budget projections and the actuarial
projections presented in this chapter indicate how
serious the problem is. It is clear from this
information that reforms are needed in these programs to
meet the long-term challenges.
6. Would it make sense for the Government to borrow to finance needed
capital--permitting a deficit in the budget--so long as the borrowing
did not exceed the amount spent on investments?
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 would not then
exceed the amount of net investment the government does
after adjusting for capital consumption. But, as
discussed in Chapter 6, Federal net investment in
physical capital is usually not very large and has even
been negative, so little if any 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 today 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 assets owned by the
Federal Government, 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, 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 are 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.
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PART II--THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES
Table 12-1 takes a backward look at the Government's assets and
liabilities summarizing what the Government owes as a result of its past
operations netted against the value of what it owns. The table gives
some perspective by showing these net asset figures for a number of
years beginning in 1960. To ensure comparability across time, the assets
and liabilities are measured in terms of constant FY 2003 dollars.
Government liabilities have exceeded the value of assets (see chart 12-
2) over this entire period, but, in the late 1970s, a speculative run-up
in the prices of oil and other real assets temporarily boosted the value
of Federal holdings. When those prices subsequently declined, Federal
asset values declined and only recently have they regained the level
they had reached temporarily in the mid-1980s.
Currently, the total real value of Federal assets is estimated to be
50 percent greater than it was in 1960. Meanwhile, Federal liabilities
have increased by over 200 percent in real terms. The decline in the
Federal net asset position has been due partly to persistent Federal
budget deficits that have boosted debt held by the public most years
since 1960. Other factors have also been important in reducing net
Federal assets such as the large increases in health benefits for
Federal retirees and the sharp rise in veterans' disability
compensation. The slower growth in Federal assets compared with
liabilities also helped reduce the net asset position.
The shift from budget deficits to budget surpluses in the late 1990s
temporarily checked the decline in Federal net assets, but only for a
few years. Currently, the net excess of liabilities over assets is about
$4.9 trillion or nearly $17,000 per capita. As a ratio to GDP, the
excess of liabilities over assets reached a peak of 51 percent in 1995;
it declined to 38 percent in 2000 and was 45 percent in 2003. The
average since 1960 has been 34 percent.
Table 12-1. GOVERNMENT ASSETS AND LIABILITIES*
(As of the end of the fiscal year, in billions of 2003 dollars)
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003
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ASSETS
Financial Assets:
Cash and Checking Deposits.......... 44 63 39 32 49 32 43 44 59 52 79 53
Other Monetary Assets............... 1 1 1 1 2 2 2 1 7 12 19 9
Mortgages........................... 28 27 40 42 78 80 102 70 81 78 76 74
Other Loans......................... 104 143 179 179 230 301 214 163 137 129 121 118
less Expected Loan Losses......... -1 -3 -5 -9 -18 -18 -20 -25 -39 -39 -46 -47
Other Treasury Financial Assets..... 63 79 69 62 87 129 206 247 226 241 258 292
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Total........................... 239 310 324 307 428 526 546 511 539 553 603 589
Nonfinancial Assets:
Fixed Reproducible Capital:......... 1,030 1,021 1,062 1,029 974 1,102 1,143 1,149 1,007 994 992 998
Defense........................... 890 836 845 772 693 806 827 808 661 640 630 631
Nondefense........................ 140 185 217 257 281 297 316 341 346 354 362 367
Inventories......................... 274 237 221 197 244 279 247 191 196 190 195 194
Nonreproducible Capital:............ 443 455 436 646 1,035 1,110 876 666 998 1,058 1,045 1,202
Land.............................. 96 133 168 266 340 353 363 282 438 457 526 553
Mineral Rights.................... 347 322 268 380 696 757 513 384 560 601 519 649
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Subtotal........................ 1,747 1,713 1,719 1,873 2,254 2,491 2,267 2,005 2,200 2,241 2,232 2,394
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Total Assets.......................... 1,986 2,023 2,043 2,180 2,682 3,018 2,813 2,515 2,739 2,795 2,835 2,984
LIABILITIES
Debt held by the Public............... 1,194 1,228 1,093 1,111 1,381 2,284 3,112 4,135 3,601 3,423 3,600 3,915
Insurance and Guarantee Liabilities:
Deposit Insurance................... ....... ....... ....... ....... 2 10 75 5 1 3 2 1
Pension Benefit Guarantee........... ....... ....... ....... 45 33 45 45 22 43 53 82 71
Loan Guarantees..................... * 1 2 7 13 11 16 31 39 40 38 36
Other Insurance..................... 33 29 23 21 28 17 21 18 17 16 16 16
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Subtotal........................ 33 30 25 73 76 83 157 76 100 112 139 124
Pension and Post-Employment Health
Liabilities:
Civilian and Military Pensions...... 836 1,051 1,256 1,423 1,889 1,874 1,832 1,776 1,810 1,819 1,861 1,886
Retiree Health Insurance Benefits... 200 252 301 341 453 449 439 426 406 795 820 842
Veterans Disability Compensation.... 198 249 298 330 339 280 252 275 584 713 863 955
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Subtotal........................ 1,234 1,552 1,855 2,094 2,680 2,603 2,523 2,477 2,800 3,328 3,544 3,684
Other Liabilities:
Trade Payables and Miscellaneous.... 29 35 44 56 86 112 154 128 104 106 104 116
Benefits Due and Payable............ 21 26 35 43 53 66 74 80 82 89 97 99
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Subtotal........................ 50 61 79 99 138 178 228 208 187 195 201 215
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Total Liabilities..................... 2,511 2,870 3,052 3,377 4,276 5,148 6,020 6,896 6,687 7,058 7,484 7,937
Net Assets (Assets Minus Liabilities). -525 -847 -1,009 -1,197 -1,594 -2,130 -3,207 -4,380 -3,948 -4,263 -4,649 -4,953
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Addenda:
Net Assets Per Capita (in 2003 -2,911 -4,365 -4,929 -5,550 -6,988 -8,921 -12,797 -16,406 -13,958 -14,908 -16,084 -16,961
dollars).............................
Ratio to GDP (in percent)............. -19.8 -25.4 -25.3 -26.5 -29.5 -33.0 -42.5 -51.4 -37.9 -41.0 -43.4 -44.6
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* This Table shows assets and liabilities for the Government as a whole, excluding the Federal Reserve System. Data for 2003 are extrapolated in some
cases.
Assets
Table 12-1 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 $0.6 trillion at the end of FY 2003. Government-held
mortgages and other loans (measured in constant dollars) reached a peak
in the early 1990s as the Government acquired mortgages from savings and
loan institutions that had failed. The Government subsequently
liquidated most of the mortgages it acquired from bankrupt savings and
loans in the 1990s. 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 was
about $40 billion as of 2003. 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 in constant dollars 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 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. The Government also holds inventories of defense
goods and other items that in 2003 amounted to about 20 percent of the
value of its fixed capital.
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, many 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 12-1. 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. They declined
sharply in 1997-1998, rebounded in 1999-2000, fell again in 2001, and
rose in 2002-2003. These fluctuations have caused the estimated value of
Federal mineral deposits to fluctuate as well. In 2003 as estimated
here, the real value of Federal land and mineral rights was higher than
at any time since 1982.
These estimates are limited to land and mineral rights. They, thus,
omit some valuable assets owned by the Federal Government, such as works
of art and historical artifacts partly because there is no realistic
basis for valuing such unique assets and also because, as part of the
Nation's historical heritage, these objects are never likely to be sold.
Total Assets: The total value of Government assets measured in
constant dollars has been increasing for the past five years, but it was
still lower in 2003 than it was in the early 1980s. The Government's
asset holdings are vast. As of the end of FY 2003, Government assets
were estimated to be worth about $3.0 trillion, about 27 percent of GDP.
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Liabilities
Table 12-1 includes Federal liabilities that would also be listed on a
business balance sheet. All the various forms of publicly held Federal
debt are counted, as are Federal pension and health insurance
obligations to civilian and military retirees and the disability
compensation that is owed the Nation's veterans. The estimated
liabilities stemming from Federal insurance programs and loan guarantees
are also shown. The benefits that are due and payable under various
Federal programs are also included, but these are short-term obligations
not long-term responsibilities.
Other obligations, including future benefit payments that are likely
to be made through Social Security and other Federal income transfer
programs, are not shown in this table. These are not Federal liabilities
in a legal or accounting sense. They are Federal responsibilities, and
it is important to gauge their size, but they are not binding in the
same way that a liability is. That is why a simple balance sheet can
give a misleading impression of the Federal financial position. The
budget projections and other data in Part III are designed to provide a
sense of these broader responsibilities and their claim on future
budgets.
Debt Held by the Public: The Federal Government's largest single
liability is the debt owed to the public. It amounted to about $3.9
trillion at the end of 2003, down from a peak value of $4.2 trillion (in
constant 2003 dollars) in 1996. Publicly held debt declined for several
years in the late 1990s because of the unified budget surplus that had
emerged at that time, but as the deficit has returned, publicly held
debt has begun to increase again, while remaining below its previous
peak level measured in real terms.
Insurance and Guarantee Liabilities: The Federal Government has
contingent liabilities arising from the loan guarantees it has made and
its insurance programs. When the Government guarantees a loan or offers
insurance, cash disbursements are often small initially, and 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 12-1 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. As is true elsewhere in this chapter, this estimate does
not incorporate the market value of the risk associated with these
contingent liabilities; it merely reflects the present value of expected
losses. Although individually many of these programs are large and
potential losses can be a serious concern, relative to total Federal
liabilities or even the total debt held by the public, these insurance
and guarantee liabilities are fairly small. They were less than 2
percent of total liabilities in 2003.
Pension and Post-Employment 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 civilian retirees with subsidized health insurance through the
Federal Employees Health Benefits program and military retirees receive
similar benefits. Veterans are owed compensation for their service
related
[[Page 190]]
disabilities. While the Government's employee pension obligations have
risen slowly, there has been a sharp increase in the liability for
future health benefits and veterans compensation. The discounted present
value of all these benefits was estimated to be around $3.7 trillion at
the end of FY 2003 up from $2.8 trillion in 2000.\2\ There was a large
expansion in Federal military retiree health benefits legislated in
2001.
---------------------------------------------------------------------------
\2\ The pension liability is the actuarial present value of benefits
accrued-to-date based on past and projected salaries. The 2003 liability
was extrapolated. The retiree health insurance liability is based on
actuarial calculations of the present value of benefits promised under
existing programs. 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. Veterans' disability
compensation was taken from the 2002 Financial Report of the United
States Government and Reports from earlier years.
---------------------------------------------------------------------------
Net Assets
The Government need not maintain a positive balance of net assets to
assure its fiscal solvency, and the buildup in net liabilities since
1960 has not significantly damaged Federal creditworthiness. Long-term
Government interest rates in 2003 reached their lowest levels in 45
years, although by year end rates were substantially above their low
point in May. For the year as a whole, the average level of long term
rates were lower than in any year since 1963. Despite the continued good
performance of interest rates, there are limits to how much debt the
Government can assume without putting its finances in jeopardy. Over an
extended time horizon, the Federal Government must take in enough
revenue to cover all of its spending including debt service. A
Government that borrows must eventually pay for what it has borrowed.
The Government's ability to service its debt in the long run, however,
cannot be gauged from a balance sheet alone. To judge the prospects for
long-run solvency it is necessary to project the budget into the future.
PART III--THE LONG-RUN BUDGET OUTLOOK
A balance sheet with its focus on obligations arising from past
transactions can only show so much information. For the Government, it
is important to anticipate what future budgetary requirements might flow
from future transactions as implied by current law. Despite their
uncertainty, very long-run budget projections 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 to grow.
Programs like Social Security and Medicare are intended to continue
indefinitely, and so long-range projections for Social Security and
Medicare have been prepared for decades. Budget projections for
individual programs, even ones as important as Social Security and
Medicare, do not reveal the Government's overall budgetary position.
Only by projecting the entire budget is it possible to anticipate
whether sufficient resources will be available to meet all the
anticipated requirements for individual programs. It is also necessary
to estimate how the budget's future growth compares with that of the
economy to judge how well the economy might be able to support future
budgetary needs.
To assess the overall financial condition of the Government, it is
necessary to examine the future prospects for all Government programs
including the revenue sources that support Government spending. Such an
assessment reveals that the key drivers of the long-range deficit are,
not surprisingly, Social Security and Medicare along with Medicaid, the
Federal program that helps States provide health coverage for low-income
people and nursing home care for the elderly. Medicaid, like Medicare
and Social Security, is projected to grow more rapidly than the economy
over the next several decades and to add substantially to the overall
budget deficit. Under current law, there is no offset anywhere in the
budget that is large enough to cover all the demands that will
eventually be imposed by Social Security, Medicare, and Medicaid.
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
uncertainty increases the further into the future projections are
extended. Such uncertainty, while making accuracy more difficult,
actually enhances the importance of long-term projections. People are
generally averse to risk, but it is not possible to assess the
likelihood of future risks without projections. Although a full
treatment of risks is beyond the scope of this chapter, the chapter is
able to show how the budget projections respond to changes in some of
the key economic and demographic parameters. Given the uncertainties,
the best that can be done is to work out the implications of expected
developments on a ``what if'' basis.
The Impending Demographic Transition
In 2008, the first members of the huge generation born after World War
II, the so-called baby-boomers, will reach age 62 and become eligible
for early retirement under Social Security. In the years that follow,
the elderly population will skyrocket, putting serious strains on the
budget because of increased expenditures for Social Security and for the
Government's health programs serving this population.
The pressures are expected to persist 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
a little over 2 by the time most of the baby-boomers have retired.
Because of lower fertility and improved mortality, that ratio is
expected to continue to decline slowly from there. With fewer workers to
pay the taxes needed to
[[Page 191]]
support the retired population, the budgetary pressures will continue to
grow. The problem posed by the demographic transition is a permanent and
a growing one.
Currently, the three major entitlement programs--Social Security,
Medicare and Medicaid--account for 43 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 70 percent of non-interest Federal spending. At the
end of the projection period, the figure rises to nearly 80 percent of
non-interest spending. In other words, under an extension of current-law
formulas and the policies in the budget, almost all of the budget would
go to these three programs alone. That would severely reduce the
flexibility of the budget, and the Government's ability to respond to
new challenges.
An Unsustainable Path
These long-run budget projections show clearly that the budget is on
an unsustainable path, although the rise in the deficit unfolds
gradually. The budget deficit is projected to decline as the economy
expands over the next several years, while most of the baby-boomers will
remain in the work force. As the baby-boomers begin to reach retirement
age in large numbers, the deficit begins to rise steadily. This process
is projected to begin about 10 years from now, i.e., in about 10 years,
the deficit as a share of GDP reaches a low point and then begins an
inexorable increase. By the end of the projection period for this
chapter in 2080, rising deficits would drive publicly held Federal debt
to levels several times the size of GDP.
The revenue projections in this section start with the budget's
estimate of receipts under the Administration's proposals. They assume
that individual income tax receipts will rise somewhat relative to GDP.
This increase reflects the higher marginal tax rates that people will
face as their real incomes rise in the future (the tax code is indexed
for inflation, but not for real economic growth). In terms of total
receipts collected relative to GDP, those income tax increases are
partly offset by declines in Federal excise tax receipts, which are
generally not indexed for inflation. Payroll taxes also are projected to
decline relative to GDP because the base for these taxes--cash wages and
salaries--has shown a tendency to decline relative to total
compensation, which again partly offsets the increase in income tax
receipts. Even so, the overall share of Federal receipts in GDP is
projected to rise above the average of 17 to 19 percent that prevailed
from 1960 through the mid-1990s and approaches 22 percent by 2080.
The long-run budget outlook is highly uncertain (see the technical
note at the end of this chapter for a discussion of the forecasting
assumptions used to make these budget projections). With pessimistic
assumptions, the fiscal picture deteriorates even sooner than in the
base projection. More optimistic assumptions imply a longer period
before the pressures of rising entitlement spending overwhelm the
budget. But despite the unavoidable uncertainty, these projections show
that under a wide range of reasonable forecasting assumptions, the
resources generated by the programs themselves will be insufficient to
cover the long-run costs of Social Security and Medicare. The recently
passed Medicare Prescription Drug, Improvement, and Modernization Act of
2003, which added a vital new prescription drug benefit to Medicare,
will put additional cost pressures on the program. However, this
legislation made other important changes to Medicare, including a
significant increase in private sector participation and new fiscal
safeguards, which may help address Medicare's long-run shortfall.
Despite these improvements, Medicare's long-run financial outlook
remains uncertain, and it is likely that further reforms will be
necessary to sustain both Medicare and Social Security in the future.
Table 12-2. LONG-RUN BUDGET PROJECTIONS OF 2005 BUDGET POLICY
(Percent of GDP)
----------------------------------------------------------------------------------------------------------------
2000 2010 2020 2030 2040 2060 2080
----------------------------------------------------------------------------------------------------------------
Discretionary Spending Grows with GDP:
Receipts.............................................. 20.9 17.9 18.6 19.0 19.5 20.6 21.6
Outlays............................................... 18.4 19.3 20.3 24.1 28.2 37.7 53.2
Discretionary....................................... 6.3 6.2 5.4 5.4 5.4 5.4 5.4
Mandatory........................................... 9.8 11.0 13.0 15.9 17.9 20.6 24.6
Social Security................................... 4.2 4.2 5.0 6.0 6.2 6.5 6.8
Medicare.......................................... 2.0 2.9 3.9 5.9 7.4 9.6 12.5
Medicaid.......................................... 1.2 1.7 2.1 2.4 2.7 3.3 4.1
Other............................................. 2.4 2.3 1.9 1.7 1.5 1.2 1.1
Net Interest........................................ 2.3 2.1 1.8 2.7 4.9 11.7 23.2
Surplus or Deficit (-)................................ 2.4 -1.4 -1.7 -5.0 -8.7 -17.2 -31.6
Primary Surplus or Deficit (-)........................ 4.7 0.7 0.1 -2.3 -3.8 -5.5 -8.4
Federal Debt Held by the Public....................... 35.1 39.3 34.0 51.3 92.2 219.3 432.3
----------------------------------------------------------------------------------------------------------------
Alternative Economic and Technical Assumptions
The quantitative 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. All show that there are
mounting deficits under most reasonable projections of the budget.
[[Page 192]]
1. Health Spending: The projections for Medicare over the next 75
years are based on the actuarial projections in the 2003 Medicare
Trustees' Report, as adjusted for the effects of the Medicare
prescription drug and modernization bill enacted in December 2003.
Following the recommendations of its Technical Review Panel, the
Medicare trustees assume that over the long-run ``age-and gender-
adjusted, per-beneficiary spending growth exceeds the growth of per-
capita GDP by 1 percentage point per year.'' This implies that total
Medicare spending will rise faster than GDP throughout the projection
period.
Eventually, the rising trend in health care costs for both Government
and the private sector will have to end, but it is hard to know when and
how that will happen. ``Eventually'' could be a long way off. Improved
health and increased longevity are highly valued, and society may be
willing spend a much larger share of income on them than it has
heretofore. Whether society will be willing to devote the large share of
resources to health care implied by these projections is an open
question. The alternatives highlight the effect of raising the projected
growth rate in per capita health care costs by 1/4 percentage point and
the effect of lowering it by the same amount.
[[Page 193]]
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 in
past budgets. Holding discretionary spending unchanged in real terms is
the ``current services'' assumption used for baseline budget projections
when there is no legislative guidance on future spending levels.
Extending this assumption over many decades, however, is not necessarily
realistic. When the population and economy are expected to grow, the
demand for public services is likely to expand, although not necessarily
as fast as GDP. The current base projection assumes that discretionary
spending keeps pace with the growth in GDP in the long run, so that
spending increases in real terms whenever there is real economic growth.
An alternative assumption would be that discretionary spending increases
only for inflation. In other words, real inflation-adjusted level of
discretionary spending holds constant. This alternative moderates the
long-run rise in the deficit because the shrinkage in discretionary
spending as a share of GDP partially offsets the rise in entitlement
outlays.
3. Productivity: The rate of future productivity growth has an
important effect on the long-run budget outlook. It is also highly
uncertain. Over the next few decades an increase in productivity growth
would reduce the projected budget deficits appreciably. Higher
productivity growth adds directly to the growth of the major tax bases,
while it has only a delayed effect on outlay growth even assuming that
in the long-run discretionary outlays rise with GDP. In the latter half
of the 1990s, after two decades of much slower growth, productivity
growth increased unexpectedly and it has increased again during the
first three years of the new century. The increase in productivity
growth is one of the most welcome developments of the last several
years. Although the long-run growth rate of productivity is inherently
uncertain, it has averaged 2.3 percent since 1948, and the long-run
budget projections assume that real GDP per hour will also grow at a 2.3
percent annual rate over most of this century. The alternatives
highlight the effect of raising the projected productivity growth rate
by 1/4 percentage point and the effect of lowering it by a same amount.
[[Page 194]]
4. Population: The key assumptions for projecting long-run demographic
developments concern fertility, immigration, and mortality.
The demographic projections assume that fertility will
average around 1.9 births per woman in the future, just
slightly below the replacement rate needed to maintain a
constant population--2.1 births.
The rate of immigration is assumed to average around 900,000
per year in these projections. Higher immigration relieves
some of the downward pressure on population from low fertility
and allows total population to expand throughout the
projection period, although at a much slower rate than has
prevailed historically in the United States.
Mortality is projected to decline; i.e., people are expected
to live longer. The average female lifespan is projected to
rise from 79.5 years in 2002 to 85.5 years by 2080, and the
average male lifespan is projected to increase from 74.2 years
in 2002 to 81.6 years by 2080. A technical panel to the Social
Security Trustees recently reported that the improvement in
longevity might even be greater.
[[Page 195]]
[[Page 196]]
Actuarial Projections for Social Security and Medicare
Social Security and Medicare are the Government's two largest
entitlement programs. Both rely on payroll tax receipts from current
workers and employers for at least part of their financing, while the
programs' benefits largely go to those who are retired. The importance
of these programs for the retirement security of current and future
generations makes it essential to understand their long-range financial
prospects. Although Social Security and Medicare's Hospital Insurance
(HI) program are currently in surplus, actuaries for both programs have
calculated that they face long-run deficits. How best to measure the
long-run imbalances in Social Security and in the consolidated Medicare
program, including Supplementary Medical Insurance (SMI) as well as HI,
is a challenging analytical question, but reasonable calculations
suggest that each program faces such a huge financial deficiency that it
will be very difficult for the Government as a whole to maintain control
of the budget without addressing each of these program's financial
problems.
[[Page 197]]
------------------------------------------------------------------------
Social Security: The Long-Range Challenge
Social Security provides retirement security and disability insurance for tens of millions of Americans through
a system that is intended to be self-financing over time. The principle of self-financing is important because
it compels corrections in the event that projected benefits consistently exceed dedicated receipts.
While Social Security is running surpluses today, it will begin running cash deficits in about 15 years. Social
Security's spending path is unsustainable under current law. The impending retirement of the baby-boom
generation, born following World War II, will greatly increase the number of Social Security beneficiaries
beginning within ten years. Demographic trends toward lower fertility rates and longer life spans mean that the
ratio of retirees to the working population will remain permanently higher. The number of workers available to
support each retiree will decline from 3.3 today to 2.2 in 2030 and continue to drift down slowly from there.
This means 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, but a gap between Social
Security receipts and outlays emerges under a wide range of reasonable forecasting assumptions. 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.
The current structure of Social Security leads to substantial generational differences in the average rate of
return people can expect from the program. While previous generations have fared extremely well, the average
individual born today can expect to receive less than a two percent annual real rate of return on their payroll
taxes (including the employer's portion, which most economists believe is borne by labor). Moreover, such
estimates in a sense overstate the expected rate of return for future retirees, because they assume no changes
in current-law taxes or benefits, even though such changes are needed to meet Social Security's financing
shortfall. As an example, a 1995 analysis found that for an average worker born in 2000 a 1.7 percent rate of
return would turn into 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 their payroll taxes in personal retirement accounts. The
President's Commission to Strengthen Social Security presented various options that would include personal
accounts within the Social Security framework.
------------------------------------------------------------------------
[[Page 198]]
------------------------------------------------------------------------
Medicare: The Long-Range Challenge
Medicare provides health insurance for tens of millions of Americans, including most of the nation's seniors. It
is composed of two programs: Hospital Insurance (HI) or Part A, which covers medical expenses relating to
hospitalization, and Supplementary Medical Insurance (SMI) or Part B, which pays for physician and outpatient
services, and will now also pay for the new prescription drug benefit.
Like social security, HI is self-financing through dedicated taxes. According to the Medicare trustees' most
recent report, projected spending for HI under current law will exceed taxes going into the HI trust fund after
2012, and the fund is projected to be depleted by 2026. Looking at the long run, the Medicare actuaries project
a 75-year unfunded promise to Medicare's HI trust fund of around $6 trillion. However, this measure tells less
than half the story because it does not include the deficiency in Medicare's SMI trust fund. SMI's only source
of dedicated revenues is beneficiary premiums, which generally cover about one-quarter of its expenses. SMI's
funding structure creates an enormous financing gap for the program, and is the largest contributor to the
total Medicare program shortfall of $15.8 trillion (or $15.6 trillion including trust fund assets). (These
estimates are as of the 2003 Medicare trustees' report and do not reflect the effects of the recent Medicare
prescription drug and reform legislation.)
SMI's financing shortfall is covered by an unlimited tap on general revenues, the ultimate source of which is
the Federal taxpayer. The new Medicare prescription drug legislation builds in fiscal safeguards to monitor
Medicare's use of general revenues. The trustees are required to analyze Medicare's reliance on these funds,
and issue a warning if Medicare's reliance on general revenues is projected to exceed 45 percent of total
Medicare expenditures at any point during the following six years. Current projections indicate that Medicare's
reliance on general revenues may exceed this threshold as early as 2014. If the trustees issue a warning in two
consecutive years, the bill provides special legislative procedures to allow the President and Congress to
address the shortfall in advance of financial crises in the Medicare trust funds.
------------------------------------------------------------------------
The 75-Year Horizon: In their annual reports and related documents,
the Social Security and Medicare trustees typically present calculations
of the 75-year actuarial imbalance or deficiency for Social Security and
Medicare. The calculation covers current workers and retirees, as well
as those projected to join the program within the next 75 years (this is
the so-called ``open-group'' calculation; the ``closed-group'' covers
only current workers and retirees''. These estimates measure the present
discounted value of each program's future benefits net of future income.
They are complementary to the flow projections described in the
preceding section.
The present discounted value of the Social Security imbalance was
estimated to be about $5 trillion at the beginning of 2003, and the
comparable estimate for Medicare was around $16 trillion. (The estimates
in Table 12-3 were prepared by the Social Security and Medicare
actuaries, and they are based on the intermediate economic and
demographic assumptions used for the 2003 trustees' reports. These
differ in some respects from the assumptions used for the long-run
budget projections described in the preceding section, but the basic
message of Table 12-3 would not change if OMB assumptions had been used
for the calculations.)
Limiting the calculations to 75 years understates the deficiencies,
because the actuarial calculations omit the large deficits that continue
to occur beyond the 75th year. The understatement is significant, even
though values beyond the 75th year are discounted by a large amount. The
current deficiency in Social Security is essentially due to the excess
benefits paid to past and current participants compared with their
taxes. For current program participants, the present value of expected
future benefits exceeds the present value of expected future taxes by
about $12 trillion. By contrast, future participants--those who are now
under age 15 or not yet born--are projected to pay in present value
about $7 trillion more over the next 75 years than they will collect in
benefits over that period. In fixing the horizon at 75 years, most of
the taxes of these future participants are counted without a full
accounting for their expected benefits, much of which will be received
beyond the 75th year. For Social Security, the present value of benefits
less taxes in the 76th year alone is nearly $0.1 trillion. Altogether,
the far distant benefits, estimated in perpetuity, add about $7 trillion
to the imbalance, which essentially offsets the expected net
contribution from future participants over the next 75 years.
Table 12-3. ACTUARIAL PRESENT VALUES OVER A 75-YEAR PROJECTION PERIOD
(Discounted Present Value of Expected Benefit Payments in Excess of Future Earmarked Taxes and Premiums as of
Jan. 1, 2003, Trillions of Dollars)
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Social Security
Future benefits less future taxes for those age 15 and over............... 9.6 10.5 11.2 11.7
Future benefits less taxes for those age 14 and under and those not yet -5.8 -6.3 -6.7 -6.8
born.....................................................................
Net present value for past, present and future participants............. 3.8 4.2 4.6 4.9
----------------------------------------------------------------------------------------------------------------
Medicare
Future benefits less future taxes and premiums for those age 15 and over.. 9.9 12.5 12.9 15.0
Future benefits less taxes and premiums for those age 14 and under and -0.7 0.3 0.4 0.8
those not yet born.......................................................
Net present value for past, present and future participants............. 9.2 12.8 13.3 15.8
----------------------------------------------------------------------------------------------------------------
Social Security and Medicare
Future benefits less future taxes and premiums for those age 15 and over.. 19.5 23.0 24.1 26.7
Future benefits less taxes and premiums for those age 14 and under and not -6.5 -6.0 -6.3 -6.0
yet born.................................................................
Net present value for past, present and future participants............... 13.0 17.0 17.8 20.7
----------------------------------------------------------------------------------------------------------------
Addendum:
Actuarial deficiency as a percent of the discounted payroll tax base:
Social Security........................................................... -1.89 -1.86 -1.87 -1.92
Medicare HI............................................................... -1.21 -1.97 -2.02 -2.40
----------------------------------------------------------------------------------------------------------------
Medicare: A significant portion of Medicare's deficiency is caused by
the rapid expected increase in future benefits due to rising health care
costs. Some, perhaps most, of the projected increase in relative health
care costs reflects improvements in the quality of care, although there
is also evidence that medical errors and waste add unnecessarily to
health care costs. Even though the projected increases in Medicare
spending are likely to contribute to longer life-spans and safer
treatments, the financial implications remain the
[[Page 199]]
same. As long as medical costs continue to outpace the growth of GDP and
other expenditures, as assumed in these projections, the financial
pressure on the budget will mount.
The rapid projected growth of Medicare spending is reflected in the
estimates in Table 12-3. For current participants, the difference
between the discounted value of benefits and taxes plus premiums is $15
trillion, which is larger than the similar gap for Social Security. For
future participants over the next 75 years, Medicare benefits are
projected to be roughly equal in magnitude to future taxes and premiums.
Unlike Social Security, the discounted value of future taxes does not
exceed benefits during this period even though benefits beyond the 75th
year are not counted. Extending the calculation beyond the 75th year
would add many trillions of dollars in present value to Medicare's
actuarial deficiency, just as it would for Social Security. Passage of
the Medicare Prescription Drug, Improvement and Modernization Act added
to Medicare's actuarial deficiency, but it is uncertain how large the
final impact will be given that the legislation increased private sector
participation and added new fiscal safeguards which may help address
Medicare's financial shortfall. The 2004 Medicare trustees' report will
provide actuarial estimates of long-run Medicare income and expenditures
that reflect the new law.
General revenues have historically covered about 75 percent of SMI
program costs, with the rest being covered by premiums paid by the
beneficiaries. In Table 12-3, only the receipts explicitly earmarked for
financing these programs have been included. The intragovernmental
transfer is not financed by dedicated tax revenues, and the share of
general revenues that would have to be devoted to SMI to close the gap
increases substantially under current projections. Other Government
programs also have a claim on these general revenues, and SMI has no
priority in the competition for future funding. From the standpoint of
the Government as a whole, only receipts from the public can finance
expenditures.
The Trust Funds and the Actuarial Deficiency: The simple fact that a
trust fund exists does not mean that the Government necessarily saved
the money recorded there. To have saved the Social Security and HI trust
fund surpluses as they accumulated would have required the Government to
set aside the surpluses reducing the unified budget deficit dollar for
dollar with the change in the trust fund balance (or adding dollar for
dollar to a unified budget surplus). It is an open question whether this
happened or not. The large unified budget deficits that prevailed during
most of the time when the trust funds were increasing suggests that the
Government did not do this, although to know this for sure it would be
necessary to know what the unified deficit would have been in the
absence of those trust fund surpluses, and that is not really knowable.
The assets in the trust funds are special purpose financial
instruments issued by the Treasury Department. At the time Social
Security or Medicare redeems these instruments to pay future benefits
not covered by future income, the Treasury will have to turn to the
public capital markets to raise the funds to finance the benefits, just
as if the trust funds had never existed. From the standpoint of overall
Government finances, the trust funds do not reduce the future burden of
financing Social Security or Medicare benefits.
In any case, the trust funds remain small in size compared with the
programs' future obligations and well short of what would be needed to
pre-fund future benefits as indicated by the programs' actuarial
deficiencies. Historically, Social Security and Medicare's HI program
were financed mostly on a pay-as-you-go basis, whereby workers' payroll
taxes were immediately used
[[Page 200]]
to pay retiree benefits. For the most part, workers' taxes have not been
used to pre-fund their own future benefits, and taxes were not set at a
level sufficient to pre-fund future benefits even had they been saved.
The Importance of Long-Run Measures in Evaluating Policy Changes:
Consider a proposed policy change in which payroll taxes paid by younger
workers were reduced by $100 this year while the expected present value
of these workers' future retirement benefits were also reduced by $100.
The present discounted value of future benefit payments would decrease
by the same amount as the reduction in revenue. On a cash flow basis,
however, the lost revenue occurs now, while the decrease in future
outlays is in the distant future beyond the budget window, and the
Federal Government must increase its borrowing to make up for the lost
revenue in the meantime. If policymakers only focus on the Government's
near-term borrowing needs, a reform such as this would appear to worsen
the Government's finances, whereas the policy actually has a neutral
impact. Extending the forecast horizon to 75 years, as in this chapter,
can help to avoid such a false impression, although any fixed horizon,
even 75 years, can give rise to a distorted comparison if budget effects
continue past that point.
Now suppose that future outlays were instead reduced by a little more
than $100 in present value. In this case, the actuarial deficiency would
actually decline, even though the Government's borrowing needs would
again increase. Focusing on the Government's near-term borrowing alone,
therefore, can lead to a bias against policies that could improve the
Federal Government's overall fiscal condition. Taking a longer view of
policy changes and considering measures of the Government's fiscal
condition other than the unified budget surplus or deficit can correct
for such mistakes.
PART IV--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. However, the fraction
of their returns 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 12-4 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. At the same time, the private wealth shown in
Table 12-4 can be drawn on by Government to finance future public
activities. The Nation's wealth sets the ultimate limit on the resources
available to the Government. 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 including
education and research and development. This may seem like a small
fraction, but it represents a large volume of capital--$6.0 trillion.
The Federal contribution is down from near 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 in the mid-1980s to 6 percent in 2003.
Table 12-4. NATIONAL WEALTH
(As of the end of the fiscal year, in trillions of 2003 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Publicly Owned Physical Assets:
Structures and Equipment.............................. 2.0 2.3 2.9 3.5 3.8 4.0 4.4 4.8 5.5 5.6 5.6 5.6
Federally Owned or Financed......................... 1.2 1.3 1.4 1.6 1.6 1.9 2.0 2.1 2.1 2.1 2.2 2.2
Federally Owned................................... 1.0 1.0 1.1 1.0 1.0 1.1 1.1 1.1 1.0 1.0 1.0 1.0
Grants to State and Local Governments............. 0.2 0.2 0.3 0.5 0.6 0.8 0.8 0.9 1.1 1.1 1.2 1.2
Funded by State and Local Governments............... 0.9 1.1 1.5 2.0 2.2 2.1 2.4 2.7 3.4 3.5 3.4 3.3
Other Federal Assets.................................. 0.7 0.7 0.7 0.8 1.3 1.4 1.1 0.9 1.2 1.2 1.2 1.4
-----------------------------------------------------------------------------------------------
Subtotal........................................ 2.8 3.0 3.5 4.4 5.1 5.4 5.5 5.6 6.7 6.8 6.8 6.9
Privately Owned Physical Assets:
Reproducible Assets................................... 7.1 8.2 10.0 12.8 16.7 17.6 20.0 21.9 26.5 27.0 27.9 28.7
Residential Structures.............................. 2.7 3.2 3.8 4.9 6.7 6.9 7.8 8.8 10.9 11.3 11.8 12.4
Nonresidential Plant and Equipment.................. 2.9 3.3 4.1 5.4 6.9 7.6 8.4 9.2 11.1 11.3 11.6 11.8
Inventories......................................... 0.6 0.7 0.9 1.1 1.4 1.3 1.4 1.4 1.6 1.5 1.5 1.5
Consumer Durables................................... 0.9 1.0 1.3 1.5 1.8 1.9 2.3 2.5 2.8 2.9 3.0 3.1
Land.................................................. 2.1 2.5 2.9 3.7 5.7 6.5 6.7 5.2 8.0 8.4 9.7 10.2
-----------------------------------------------------------------------------------------------
Subtotal........................................ 9.2 10.7 12.9 16.5 22.4 24.1 26.6 27.1 34.5 35.4 37.5 38.9
Education Capital:
Federally Financed.................................... 0.1 0.1 0.2 0.3 0.5 0.6 0.8 0.9 1.2 1.2 1.3 1.4
Financed from Other Sources........................... 6.2 8.0 10.8 13.3 17.4 20.8 26.9 30.1 39.1 40.7 42.2 44.0
-----------------------------------------------------------------------------------------------
Subtotal........................................ 6.3 8.1 11.0 13.6 17.8 21.4 27.7 31.0 40.3 41.9 43.5 45.4
Research and Development Capital:
Federally Financed R&D................................ 0.2 0.3 0.5 0.6 0.6 0.7 0.8 0.9 1.0 1.0 1.1 1.1
R&D Financed from Other Sources....................... 0.1 0.2 0.3 0.4 0.5 0.7 0.9 1.1 1.5 1.6 1.7 1.7
-----------------------------------------------------------------------------------------------
Subtotal........................................ 0.3 0.6 0.8 0.9 1.1 1.4 1.7 2.1 2.5 2.6 2.7 2.9
===============================================================================================
Total Assets............................................ 18.6 22.3 28.2 35.5 46.4 52.2 61.5 65.8 84.0 86.8 90.6 94.1
Net Claims of Foreigners on U.S. (+).................... -0.1 -0.2 -0.2 -0.1 -0.4 0.0 0.9 1.5 2.8 2.7 3.1 4.2
Net Wealth.............................................. 18.7 22.5 28.4 35.6 46.7 52.2 60.6 64.3 81.1 84.1 87.5 89.9
��������������������������������������������������������������������������������������������������������������������������������������������������������
ADDENDA:
Per Capita Wealth (thousands of 2003 dollars)........... 103.6 115.9 138.5 165.1 204.8 218.6 242.0 240.8 286.9 294.0 302.7 307.8
Ratio of Wealth to GDP (in percent)..................... 704.4 716.4 695.7 696.3 679.2 674.0 663.6 683.5 688.9 711.4 714.4 718.2
Total Federally Funded Capital (trils 2003 dollars)..... 2.1 2.4 2.8 3.3 3.9 4.5 4.7 4.8 5.5 5.6 5.8 6.1
Percent of National Wealth.............................. 11.5 10.7 9.9 9.3 8.4 8.7 7.8 7.4 6.8 6.7 6.6 6.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 $46 trillion in 2003,
consisting of $39 trillion in private physical capital and $7 trillion
in public physical capital (including capital funded by State and local
governments); by comparison, GDP was about $11 trillion in 2003. The
Federal Government's contribution to this stock of capital includes its
own physical assets of $2.4 trillion 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.
[[Page 201]]
population aged 16 and over; in other words, the goal 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
$45 trillion in 2003, of which about 3 percent was financed by the
Federal Government. It was 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. Labor compensation, however,
amounts to about two-thirds of national income with the other third
attributed to capital and thinking of this labor 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 assuming human capital
had earned a similar rate of return to other forms of 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 constitute the 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.\3\ That stock
is estimated to have been $2.9 trillion in 2003. Although this
represents a large amount of research, it is a relatively small portion
[[Page 202]]
of total National wealth. Of this stock, 38 percent was funded by the
Federal Government.
---------------------------------------------------------------------------
\3\ 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. When the
debts of one American are the assets of another American, these debts
are not a net liability of the Nation as a whole. Table 12-4 is intended
to show National totals only. Total debt is important even though it
does not appear in Table 12-4. The amount of debt owed by Americans to
other Americans can exert both positive and negative effects on the
economy. Americans' willingness and ability to borrow helped fuel the
expansion of the 1990s, and continues to support consumption in the
current recovery. On the other hand, bad debts, which are not
collectible, can cause serious problems for the banking system.
The only debts that do appear in Table 12-4 are the debts Americans
owe to foreigners. America's foreign debt has been increasing rapidly in
recent years, because of the rising imbalance 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 4.5 percent of total assets in
2002.
Federal debt does not appear explicitly in Table 12-4 because most of
it consists of claims held by Americans; only that portion of the
Federal debt which is held by foreigners is included along with the
other debts 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 12-1, amount to 5.6 percent of net U.S. wealth as shown in
Table 12-4. Prospectively, however, Federal liabilities are a much
larger share of national wealth, as shown by the long-run projections in
Part III.
Trends in National Wealth
The net stock of wealth in the United States at the end of FY 2003 was
about $90 trillion, about eight times the level of GDP. Since 1961, it
has increased in real terms at an average annual rate of 3.7 percent per
year. It grew very rapidly from 1960 to 1973, at an average annual rate
of 4.5 percent per year, slightly faster than real GDP grew over the
same period. Between 1973 and 1995 growth slowed, as real net wealth
grew at an average rate of just 3.1 percent per year, which paralleled
the slowdown in real GDP over this period. Since 1995 growth has picked
up for both net wealth and real GDP, with wealth growing at an average
rate of 4.3 percent since 1995. This is the same period in which
productivity growth accelerated following a similar slowdown from 1973
to 1995.
The net stock of private nonresidential plant and equipment accounts
for about 30 percent of privately owned physical capital. It grew 3.3
percent per year on average from 1960 to 2003. It grew especially
rapidly from 1960 to 1973, at an average rate of 3.9 percent per year.
Since 1973 it has grown more slowly, averaging around 3.0 percent per
year. Unlike most other categories of wealth accumulation, there was
very little acceleration in the growth of plant and equipment over the
last eight years compared with 1973-1995. Private plant and equipment
grew 3.0 percent per year on average between 1973 and 1995 and just 3.1
percent per year from 1995 through 2003. Higher than average growth in
the investment boom of the late 1990s has been offset by less rapid
growth since then. Meanwhile, privately owned residential structures,
consumer durables and land have all grown more rapidly in real value
since 1995 than from 1973 to 1995.
The accumulation of education capital has averaged 4.7 percent per
year since 1960. It also slowed down between 1973 and 1995, and has
grown somewhat more rapidly since then. It grew at an average rate of
5.8 percent per year in the 1960s, about 1.9 percentage point faster
than the average rate of growth in private physical capital during the
same period. Since 1995, education capital has grown at a 4.9 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 4.2 percent per year
since 1995.
Other Federal Influences on Economic Growth
Federal investment decisions, as reflected in Table 12-4, 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 12-5 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 12-5. ECONOMIC AND SOCIAL INDICATORS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
General categories Calendar Years 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
Living Standards.......... Real GDP per person (2000 dollars).................... 13,840 16,420 18,392 19,961 22,666 25,382 28,429 30,128 34,753 34,550 34,934 35,648
average annual percent change (5-year trend).......... 1.7 3.5 2.3 1.7 2.6 2.3 2.3 1.2 2.9 2.3 1.8 1.7
Median Income:........................................ ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
All Households (2002 dollars)......................... N/A N/A 35,030 34,763 36,608 37,648 39,949 39,931 43,848 42,900 42,409 N/A
Married Couple Families (2001 dollars) \1\............ 29,746 34,620 41,516 43,113 47,086 48,798 52,394 54,284 60,748 60,335 N/A N/A
Female Householder, Husband Absent (2001 dollars) \1\. 15,032 16,831 20,107 19,847 21,177 21,434 22,237 22,713 26,434 25,745 N/A N/A
Income Share of Lower 60% of All Households........... 31.8 32.2 32.3 32.0 31.5 30.0 29.4 28.0 27.3 26.8 27.1 N/A
Poverty Rate (%) \2\.................................. 22.2 17.3 12.6 12.3 13.0 14.0 13.5 13.8 11.3 11.7 12.1 N/A
Economic Security......... Civilian Unemployment (%)............................. 5.5 4.5 4.9 8.5 7.1 7.2 5.5 5.6 4.0 4.8 5.8 6.0
CPI-U (% Change)...................................... 1.7 1.6 5.8 9.1 13.5 3.5 5.4 2.8 3.4 2.8 1.6 2.3
Employment................ Increase in Total Payroll Employment Previous 12 -0.4 2.9 -0.4 0.4 0.3 2.5 0.3 2.2 1.9 -1.8 -0.5 -0.1
Months.
Managerial or Professional Jobs (% of civilian N/A N/A N/A N/A N/A 27.3 29.2 32.0 33.8 34.4 34.6 34.8
employment).
Wealth Creation........... Net National Saving Rate (% of GDP) \3\............... 10.2 12.1 8.2 6.6 7.5 6.1 4.6 4.7 5.9 3.3 1.6 0.7
Innovation................ Patents Issued to U.S. Residents (thousands) \4\...... 42.3 54.1 50.6 51.5 41.7 45.1 56.1 68.2 103.6 105.5 99.6 N/A
Multifactor Productivity (average 5 year percent 0.9 2.9 0.8 1.1 0.8 0.5 0.5 0.6 1.1 0.7 N/A N/A
change).
Nonfarm Output per Hour (average 5 year percent 1.8 3.5 2.0 2.3 1.2 1.7 1.4 1.5 2.5 2.4 3.0 3.4
change).
Environment:
Air Quality............... Nitrogen Oxide Emissions (thousand short tons)........ 18,163 21,296 26,883 26,377 27,079 25,757 25,530 24,956 23,199 22,349 N/A N/A
Sulfur Dioxide Emissions (thousand short tons)........ 22,268 26,799 31,218 28,043 25,925 23,307 23,078 18,619 16,317 15,790 N/A N/A
Lead Emissions (thousand short tons).................. N/A N/A 221 160 74 23 5 4 4 4 N/A N/A
Water Quality............. Population Served by Secondary Treatment or Better N/A N/A N/A N/A N/A 140.3 162.3 173.8 201.4 N/A N/A N/A
(mils).
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 22.3 22.7 23.2 N/A
Safe Communities.......... Violent Crime Rate (per 100,000 population) \5\....... 160.0 199.0 364.0 482.0 597.0 558.1 729.6 684.5 506.5 504.5 494.6 483.8
Murder Rate (per 100,000 population) \5\.............. 5.1 5.1 7.8 9.6 10.2 8.0 9.4 8.2 5.5 5.6 5.6 5.6
Murders (per 100,000 Persons Age 14 to 17)............ N/A N/A N/A 4.5 5.9 4.9 9.8 11.0 4.7 N/A 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 6.7 6.8 6.9 6.7
Low Birthweight [<2,500 gms] Babies (%)............... 7.7 8.3 7.9 7.4 6.8 6.8 7.0 7.3 7.6 7.7 7.8 N/A
Life Expectancy at birth (years)...................... 69.7 70.2 70.8 72.6 73.7 74.7 75.4 75.8 77.0 77.2 N/A N/A
Cigarette Smokers (% population 18 and older) \6\..... N/A 41.9 39.2 36.3 33.0 29.9 25.3 24.6 23.1 22.6 22.3 21.6
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 84.1 84.3 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 25.6 26.1 N/A N/A
Participation............. Individual Charitable Giving per Capita (2000 dollars) 240 288 345 367 400 411 456 432 575 585 573 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
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Median income for married couple and female householder families not updated yet for 2002.
\2\ The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
\3\ Does not reflect December 2003 revisions to National Income and Product Accounts, which are not yet complete for national saving. 2003 through Q3 only.
\4\ Preliminary data for 2002.
\5\ Not all crimes are reported, and the fraction that go unreported may have varied over time, 2003 data are preliminary for the first half of the year.
\6\ Smoking data for 2003 through June.
The indicators shown in Table 12-5 are only a subset drawn from the
vast array of available data on conditions in the United States. In
choosing indicators for this table, priority was given to measures that
were consistently available over an extended period. Such indicators
make it easier to draw valid comparisons and evaluate trends. In some
cases, however, this meant choosing indicators with significant
limitations.
The individual measures in this table are influenced to varying
degrees by many Government policies and programs, as well as by external
factors beyond the Government's control. They do not measure the
outcomes of Government policies, because they generally
[[Page 203]]
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 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
[[Page 204]]
than at any time since the 1960s. The 2001 recession has had an effect
on some of these indicators. Unemployment has risen and real GDP growth
has declined. But as the economy recovers much of the improvement shown
in Table 12-5 is likely to be preserved and extended.
TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATING
Long-Range Budget Projections
The long-range budget projections are based on long-range demographic
and economic assumptions. A simplified model of the Federal budget,
developed at OMB, computes the budgetary implications of these
assumptions.
Demographic and Economic Assumptions: Through 2014, the assumptions
are identical to those used for the budget. These budget assumptions
reflect the President's policy proposals. The economic assumptions are
extended beyond this point by holding constant inflation, interest
rates, and unemployment at the levels assumed in the final year of the
budget forecast. Population growth and labor force growth are extended
using the intermediate assumptions from the 2003 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. Productivity growth is held constant at the average rate of
growth implied by the budget's economic assumptions.
CPI inflation holds stable at 2.5 percent per year; the
unemployment rate is constant at 5.1 percent; and the yield on
10-year Treasury notes is steady at 5.8 percent, which are the
final values at the end of the budget forecast for each of
these variables.
Real GDP per hour grows at the same average rate as in the
Administration's medium-term projections--2.3 percent per
year--through 2080.
Consistent with the demographic assumptions in the trustees'
reports, U.S. population growth slows from around 1 percent
per year to about half that rate by 2030, and even slower
rates of growth beyond that point. Population growth reaches
0.3 percent per year at the end of the projection period in
2080 and it is still slowing.
Real GDP growth declines over time with the expected
slowdown in population growth which feeds through to the labor
force. An aging population also contributes less work effort,
and this is also reflected in the projections. Historically,
real GDP has grown at an average yearly rate of 3.4 percent.
In these projections, real GDP growth declines to 2.6 percent
by 2020, and averages that rate for the next 60 years.
The economic and demographic 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.
Budget Projections: For the period through 2014, receipts and outlays
follow the budget's policy 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 projections. Discretionary outlays grow at the
rate of growth in nominal GDP. Social Security is projected by the
Social Security actuaries using these long-range assumptions. Medicare
benefits are projected based on the estimates in the 2003 Medicare
trustees' report, adjusted for differences in the assumed growth rate in
GDP per capita and for the effects of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. Federal pensions are derived
from the most recent actuarial forecasts available at the time the
budget is prepared, repriced using Administration inflation and wage
growth assumptions. Medicaid outlays are based on the economic and
demographic projections in the model. Other entitlement programs are
projected based on rules of thumb linking program spending to elements
of the economic and demographic projections such as the poverty rate.
Federally Owned Assets and Liabilities
Financial Assets: The source of data is the Federal Reserve Board's
Flow-of-Funds Accounts.
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, the
nominal investment series was deflated using chained price indexes for
Federal investment from the National Income and Product Accounts. The
resulting capital stocks were aggregated into nine categories and
depreciated using geometric rates roughly following those used by the
Bureau of Economic Analysis in its estimates of physical capital stocks.
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.
Debt Held by the Public: Treasury data.
Insurance and Guarantee Liabilities: Sources of data are the OMB
Pension Guarantee Model and OMB esti
[[Page 205]]
mates 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 and Post-Employment Health Liabilities: For 1979-2001, 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 2002 is a projection. The health
insurance liability was estimated by the program actuaries for 1997-
2001, and extrapolated back for earlier years. Veterans disability
compensation was taken from the Financial Report of the United States
Government (and the Consolidated Financial Statement for some earlier
years). Prior to 1976, the values were extrapolated. For 2003, the
estimates from the Department of Veterans Affairs' 2003 Performance and
Accountability Report.
Other Liabilities: The source of data for trade payables and
miscellaneous liabilities is the Federal Reserve's Flow-of-Funds
Accounts. The Financial Report of the United States Government was the
source for benefits due and payable.
National Balance Sheet
Publicly Owned Physical Assets: Basic sources of data for the
Federally owned stocks of capital are the Federal investment flows
described in Chapter 6. Federal grants for State and local government
capital are added, together with adjustments for inflation and
depreciation in the same way as described above for direct Federal
investment. Data for total State and local government capital come from
the revised capital stock data prepared by the Bureau of Economic
Analysis extrapolated for 2002-03.
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 2002-03
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. The Federal share of the total education stock in each year is
estimated by averaging the prior years' shares of Federal education
outlays in total education costs.
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 deflator to convert them to constant dollar values.
Federally funded capital stock estimates were prepared using the
perpetual inventory method in which annual investment flows are
cumulated to arrive at a capital stock. This stock was adjusted for
depreciation by assuming an annual rate of depreciation of 10 percent on
the estimated stock of applied research and development. Basic research
is assumed not to depreciate. These are the same assumptions used in a
study published by the Bureau of Labor Statistics estimating the R&D
stocks financed by private industry U.S. Department of Labor, Bureau of
Labor Statistics, The Impact of Research and Development on Productivity
Growth, Bulletin 2331, September 1989. Chapter 6 of this volume contains
additional details on the estimates of the total federally financed R&D
stock, as well as its national defense and nondefense components.
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
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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 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 12-5 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.
Sources of Data and Assumptions for Estimating 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.