[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.
---------------------------------------------------------------------------
  \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.
---------------------------------------------------------------------------
          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
 
 
------------------------------------------------------------------------
 
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)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          1960     1965     1970     1975     1980     1985     1990      1995      2000      2001      2002      2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
                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
                                       -----------------------------------------------------------------------------------------------------------------
      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
                                       -----------------------------------------------------------------------------------------------------------------
      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
                                       -----------------------------------------------------------------------------------------------------------------
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
                                       -----------------------------------------------------------------------------------------------------------------
      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
                                       -----------------------------------------------------------------------------------------------------------------
      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
                                       -----------------------------------------------------------------------------------------------------------------
      Subtotal........................       50       61       79       99      138      178       228       208       187       195       201       215
                                       -----------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 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
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
                        ADDENDA:
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

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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

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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.