[Analytical Perspectives]
[Economic Assumptions and Analyses]
[13. Stewardship]
[From the U.S. Government Printing Office, www.gpo.gov]
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13. 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 deficit provide only a partial
picture of the consequences of the Government's financial and investment
decisions. Indeed, changes in the annual budget deficit or surplus can
be misleading. 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 judge
the Government's fiscal condition properly.
For the Federal Government, there is no single number that corresponds
to a business's bottom line. The Government is 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 13-1 is a schematic diagram showing the
linkages.
Part II presents the Government's physical and financial
assets and its legal liabilities, which are all collected in
Table 13-1. 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 13-2 and in a related set of charts. This part also
provides present value estimates of the funding shortfall in
Social Security and Medicare in Table 13-3. These data
indicate the Government's future responsibilities and
resources under current law and policy. In particular, they
show the looming challenge that Federal entitlement programs
present 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
13-4 presents summary data for total national wealth, while
highlighting the Federal investments that have contributed to
that wealth. Table 13-5 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. 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 or deficit. It includes balance-sheet
information, but it goes beyond that to include long-run projections of
the budget showing 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. 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 13-1. Although they are important, the obligations
shown in Table 13-1 are only a subset of the Government's 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
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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. These include, to mention only a few examples:
Medicaid, veterans' pensions and health care, and food stamps. It also
provides a wide range of other public services that must be financed
through the tax system. The specific benefits and services may be
modified or even ended at any time by the Congress and the President.
Indeed, changes in laws governing these programs are a regular part of
the legislative cycle. For these reasons, these programmatic commitments
do not constitute ``liabilities'' in a legal or accounting sense, and
they would not appear on a balance sheet. Until modified by law, 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 has many assets. These include financial
assets, such as loans and mortgages which the Government has acquired
though a variety of credit programs. They also include the physical
plant and equipment used to produce Government services. The Government
owns a substantial amount of land. Such assets would normally be shown
on a balance sheet. The Government also has resources that go beyond the
assets that would be expected to appear on a balance sheet. These
additional resources include most importantly the Government's sovereign
power to tax.
Because of its unique 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. Part III of
this chapter presents a set of such projections under different
assumptions about policy and future economic and demographic conditions.
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, 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 providing more complete
information about Government programs and permit a closer alignment of
the cost of programs with performance measures. These changes have been
described in detail in previous Budgets. They are described in chapter 2
of this volume, and in the accompanying material that describes results
obtained with the Program Assessment Rating Tool (PART). This chapter
complements the detailed exploration of Government performance with an
assessment of the overall impact of Federal policy as reflected in
general measures of economic and social well-being, which are presented
in Table 13-5.
Relationship with FASAB Objectives
The framework presented here meets the stewardship objective\1\ for
Federal financial reporting recommended by the Federal Accounting
Standards Advisory Board (FASAB) and adopted for use by the Federal
Government in September 1993.
\1\ Statement of Federal Financial Accounting Concepts, Number 1,
Objectives of Federal Financial Reporting, September 2, 1993. Other
objectives are budgetary integrity, operating performance, and systems
and controls.
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Federal financial reporting should assist report users in
assessing the impact on the country of the government's operations
and investments for the period and how, as a result, the
government's and the Nation's financial conditions have changed
and may change in the future. Federal financial reporting should
provide information that helps the reader to determine:
3a. Whether the government's financial position improved or
deteriorated over the period.
3b. Whether future budgetary resources will likely be sufficient
to sustain public services and to meet obligations as they come
due.
3c. Whether government operations have contributed to the
nation's current and future well-being.
The presentation here is an experimental approach for meeting this
objective at the Government-wide level. It is 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 balance sheet.
The assets and liabilities on that balance sheet are all based on
transactions and other events that have already occurred. A similar
table can be found in Part II of this chapter but based on different
data and methods of valuation. The Report also includes a statement of
social insurance that reviews a substantial body of information on the
condition and sustainability of the Government's social insurance
programs. However, the Report does not extend that review to the
condition or sustainability of the Government as a whole, which is a
main focus of this chapter.
Connecting the Dots: The presentation that follows consists in large
part of a series of tables and charts.
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The schematic diagram, Chart 13-1, 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 categories--assets/
resources and liabilities/responsibilities.
The left-hand side of Chart 13-1 shows the full range of
Federal resources, including assets the Government owns, tax
receipts it can expect to collect given current and proposed
law, and national wealth, including the trained skills of the
national work force, that provide the base for Government
revenues.
The right-hand side reveals the full range of Federal
obligations and responsibilities, beginning with the
Government's acknowledged liabilities from past actions, such
as the debt held by the public, and including future budget
outlays needed to 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 13-1, 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 different objectives from a
business firm. The goal of every business is to earn a
profit, and as a general rule the Federal Government
properly leaves 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 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. Business investment motives 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 13-1 seems to imply that the Government is insolvent. Is it?
No. Just as the Federal Government's responsibilities are
different from those of 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--Continued
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3. Why are Social Security and Medicare not shown as Government
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 13-1. They appear in two
ways: budget projections as a percent of GDP in Table 13-
2, and the actuarial deficiency estimates in Table 13-3.
Other Federal programs make similar promises to those of
Social Security and Medicare--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 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 doesn't the Federal Government follow normal business practice
in its bookkeeping?
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, 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--Continued
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5. When the baby boom generation begins to retire in large numbers
The aging of the 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 shown in this chapter
and the actuarial projections prepared for Social
Security and Medicare 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 the Federal 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 would 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 pursues policies that
support the overall economic well-being of the Nation
and its security interests. For such reasons, the
Government may deem it desirable to run a budget
surplus, even if this means paying for its own
investments from current receipts, and there will be
other times when it is necessary to run a deficit, even
one that exceeds Government net investment.
Considerations in addition to the size of Federal
investment must be weighed in choosing the right level
of the surplus or deficit.
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PART II--THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES
Table 13-1 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 2004 dollars and
the balance is also shown as a ratio to GDP. Government liabilities have
exceeded the value of assets (see chart 13-2) 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 in the
mid-1980s.
Currently, the total real value of Federal assets is estimated to be
62 percent greater than it was in 1960. Meanwhile, Federal liabilities
have increased by 234 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 such as the large increases
in health benefits for Federal retirees and the sharp rise in veterans'
disability compensation. The relatively slow growth in Federal asset
values 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
$5.3 trillion or about $18,000 per capita. As a ratio to GDP, the excess
of liabilities over assets reached a peak of 51 percent in 1993; it
declined to 38 percent in 2000; it rose above 45 percent in 2003; and it
fell below 45 percent in 2004. The average since 1960 has been 34
percent (see Table 13-1).
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Table 13-1. GOVERNMENT ASSETS AND LIABILITIES*
(As of the end of the fiscal year, in billions of 2004 dollars)
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
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ASSETS
Financial Assets:
Cash and Checking Deposits.......... 45 65 40 33 50 33 44 46 60 81 54 54
Other Monetary Assets............... 1 1 1 1 2 2 2 1 7 19 9 2
Mortgages........................... 29 28 41 43 80 82 105 72 83 78 75 74
Other Loans......................... 107 147 184 184 238 309 219 167 140 124 120 118
less Expected Loan Losses......... -1 -3 -5 -10 -18 -18 -21 -26 -40 -47 -48 -47
Other Treasury Financial Assets..... 65 81 71 64 90 132 211 254 232 263 315 311
Subtotal........................ 245 318 332 315 442 540 560 524 552 616 624 606
Nonfinancial Assets:
Fixed Reproducible Capital.......... 1,074 1,065 1,108 1,075 1,018 1,151 1,194 1,200 1,053 1,032 1,037 1,061
Defense........................... 925 869 879 803 720 838 860 840 687 652 653 667
Nondefense........................ 148 196 229 272 297 313 334 360 365 379 384 394
Inventories......................... 281 243 226 202 250 286 254 195 201 200 247 249
Nonreproducible Capital............. 454 466 447 662 1,062 1,138 898 675 1,000 1,018 1,179 1,401
Land.............................. 99 137 172 273 348 362 372 282 426 487 517 601
Mineral Rights.................... 356 330 275 390 713 776 526 393 574 532 663 801
Subtotal........................ 1,809 1,775 1,781 1,939 2,330 2,575 2,346 2,071 2,254 2,250 2,463 2,711
Total Assets.......................... 2,054 2,093 2,114 2,254 2,772 3,115 2,906 2,594 2,806 2,866 3,087 3,318
LIABILITIES
Debt held by the Public............... 1,225 1,259 1,120 1,139 1,416 2,341 3,190 4,240 3,692 3,685 4,002 4,296
Insurance and Guarantee Liabilities:
Deposit Insurance................... ....... ....... ....... ....... 2 10 77 5 1 2 1 1
Pension Benefit Guarantee ....... ....... ....... 46 34 47 46 22 44 84 73 88
Corporation........................
Loan Guarantees..................... ....... 1 2 7 13 11 17 32 40 39 37 43
Other Insurance..................... 33 30 23 21 29 18 21 19 17 17 16 16
Subtotal........................ 33 31 26 74 78 85 161 78 102 142 127 148
Pension and Post-Employment Health
Liabilities:
Civilian and Military Pensions...... 857 1,077 1,288 1,459 1,937 1,921 1,878 1,821 1,856 1,905 1,989 2,022
Retiree Health Insurance Benefits... 205 258 309 350 464 461 450 437 416 839 943 1,009
Veterans Disability Compensation.... 203 256 305 338 347 287 258 282 598 884 976 925
Subtotal........................ 1,266 1,591 1,902 2,148 2,748 2,669 2,587 2,540 2,871 3,628 3,909 3,956
Other Liabilities:
Trade Payables and Miscellaneous.... 29 36 46 57 88 115 158 131 107 108 110 106
Benefits Due and Payable............ 22 26 35 37 48 53 63 74 84 99 102 105
Subtotal........................ 51 62 81 94 135 168 221 204 191 207 212 211
Total Liabilities..................... 2,575 2,943 3,129 3,455 4,377 5,263 6,159 7,062 6,857 7,663 8,249 8,611
Net Assets (Assets Minus Liabilities). -521 -850 -1,015 -1,201 -1,606 -2,148 -3,253 -4,468 -4,051 -4,796 -5,162 -5,293
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Addenda:
Net Assets Per Capita (in 2004 -2,890 -4,382 -4,959 -5,569 -7,041 -8,997 -12,982 -16,733 -14,324 -16,620 -17,711 -17,988
dollars).............................
Ratio to GDP (in percent)............. -19.2 -24.9 -24.8 -25.9 -29.0 -32.5 -42.0 -51.1 -37.9 -43.7 -45.4 -44.8
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* This table shows assets and liabilites for the Government as a whole excluding the Federal Reserve System. Data for 2004 are extrapolated in some
cases.
Table 13-1 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 2004. Government-held
mortgages (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 these bankrupt savings and loans.
Meanwhile, Government holdings of other loans have been declining in
real terms since the mid-1980s. 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
around $50 billion as of 2004. 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 2-1/4 percent. The Gov
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ernment also holds inventories of defense goods and other items that in
2004 amounted to about 25 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 13-1. 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 2002-2004. These fluctuations have caused the estimated value of
Federal mineral deposits to fluctuate as well. In 2004 as estimated
here, the combined real value of Federal land and mineral rights was
higher than it has ever been, but only 3 percent greater than in 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 available
inventory or realistic basis for valuing such unique assets.
Total Assets: The total value of Government assets measured in
constant dollars has risen sharply in the past three years, and was
higher in 2004 than ever before. The Government's asset holdings are
vast. As of the end of FY 2004, Government assets were estimated to be
worth about $3.3 trillion or 28 percent of GDP.
Liabilities
Table 13-1 includes all Federal liabilities that would normally be
listed on a 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, which can be thought of
as a form of deferred compensation. 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 liabilities reflect only binding short-term
obligations, not the Government's full commitment under these programs.
Future benefit payments that are likely to be made through Social
Security and other Federal income transfer programs are not Federal
liabilities in a legal or accounting sense. They are Federal
responsibilities, however, and it is important to gauge their size, but
they are not binding in the same way as a legally enforceable claim
would be. That is why a 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 $4.3
trillion at the end of 2004. 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.
Insurance and Guarantee Liabilities: The Federal Government has
contingent liabilities arising from the loan guarantees it has made and
from 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 13-1 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 2004.
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 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 $4.0 trillion at the end of FY 2004 up from $2.9 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 2004 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 2004 Financial Report of the United
States Government and Reports from earlier years.
---------------------------------------------------------------------------
The Balance of Net Liabilities
The Government need not maintain a positive balance of net assets to
assure its fiscal solvency, and the buildup in net liabilities since
1960 has not significantly affected Federal creditworthiness. Long-term
Government interest rates in 2003 reached their lowest
[[Page 208]]
levels in 45 years, and in 2004 they remained lower than at any time
from 1965 through 2002. 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. The Government's ability to
service its debt in the long run 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. That is the subject of the next
section.
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 the
uncertainty surrounding the necessary underlying assumptions, 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 important ones such as Social Security and
Medicare, however, 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 3.3 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 support the retired population, the budgetary pressures
will continue to grow. The problem posed by the demographic transition
is a permanent one; indeed, it is a growing one.
Currently, the three major entitlement programs--Social Security,
Medicare and Medicaid--account for 44 percent of non-interest Federal
spending, up from 30 percent in 1980. By 2035, when the remaining baby
boomers will be in their 70s and 80s, these three programs could easily
account for nearly two-thirds of non-interest Federal spending. At the
end of the projection period, the figure rises to around three-quarters
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,
aside from interest, 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
[[Page 209]]
the next several years, while most of the baby boomers are still in the
work force. As the baby boomers begin to reach retirement age in large
numbers, the deficit begins to rise. In about 10 years, the deficit as a
share of GDP is projected to reach a low point and then begin an
inexorable increase. By the end of this chapter's projection period,
rising deficits would drive publicly held Federal debt to levels 2-\1/2\
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 to eventually reach around 22
percent of GDP.
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 forecasting assumptions, the resources
generated by the programs themselves will be insufficient to cover the
long-run costs of Social Security and Medicare.
Table 13-2. LONG-RANGE MODEL RESULTS
(As a percent of GDP)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995 2005 2015 2025 2035 2045 2055 2065 2075
--------------------------------------------------------------------------------------------------------------------------------------------------------
Receipts............................................. 18.5 16.8 18.5 19.1 19.6 20.2 20.9 21.5 22.0
Outlays:
Discretionary...................................... 7.4 7.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9
Mandatory:
Social Security.................................. 4.5 4.2 4.4 5.4 6.0 6.0 6.1 6.2 6.4
Medicare......................................... 2.1 2.4 3.3 4.6 6.0 7.0 7.9 9.1 10.4
Medicaid......................................... 1.2 1.5 1.9 2.1 2.3 2.6 2.8 3.0 3.3
Other............................................ 2.2 2.8 2.0 1.7 1.5 1.3 1.2 1.1 1.0
Subtotal, mandatory............................ 10.1 10.9 11.6 13.8 15.8 16.9 18.0 19.5 21.2
Net Interest....................................... 3.2 1.5 1.9 2.0 3.1 4.8 6.9 9.7 13.3
Total outlays.................................. 20.7 20.3 19.4 21.8 24.8 27.6 30.8 35.1 40.4
Surplus or Deficit (-)............................... -2.2 -3.5 -0.9 -2.7 -5.2 -7.4 -10.0 -13.6 -18.4
Federal Debt Held by the Public...................... 49.2 38.6 35.6 38.1 58.7 90.4 130.0 181.3 249.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The figures shown in this table for 2015 and beyond are the product of a long-range forecasting model maintained by the Office of Management and
Budget. This model is separate from the models and capabilities that produce the detailed programmatic estimates in the Budget. It was designed to
produce long-range forecasts based on additional assumptions regarding the growth of the economy, the long-range evolution of specific programs, and
the demographic and economic forces affecting those programs. The model, its assumptions, and sensitivity testing of those assumptions are presented
in this chapter.
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. All show that
there are mounting deficits under most reasonable projections of the
budget.
1. Health Spending: The projections for Medicare over the next 75
years are based on the actuarial projections in the 2004 Medicare
Trustees' Report, that include the effects of the Medicare Prescription
Drug and Modernization bill enacted in 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. Improved health and increased longevity are highly
valued, and society has shown that it is willing to spend a larger share
of income on them than it did in the past. 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 or lowering the projected growth rate in per capita
health care costs by \1/4\ percentage point.
[[Page 210]]
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 realistic.
When the population and economy grow, as assumed in these projections,
the demand for public services is very likely to expand as well. 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 to limit the percentage increase in discretionary
spending to the increase in population plus inflation, in other words,
to hold the real per capita inflation-adjusted level of discretionary
spending 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.
[[Page 211]]
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 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, the rate of productivity
growth increased unexpectedly and it has increased again since 2000.
This 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. This is a
cautious assumption. If the recent increase in trend productivity growth
is sustained, it might continue growing faster than the historical
average for some time to come. The alternatives highlight the effect of
raising the projected productivity growth rate by \1/4\ percentage point
and the effect of lowering it by the same amount.
[[Page 212]]
4. Population: The key assumptions for projecting long-run demographic
developments are 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.
[[Page 213]]
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 growth from low
fertility and allows total population to expand throughout the
projection period, although at a much slower rate than has
prevailed historically.
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 2003 to 85.3 years by 2080, and the
average male lifespan is projected to increase from 74.4 years
in 2003 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 214]]
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. Both programs' actuaries have calculated that they face
persistent long-run deficits. How best to measure the long-run imbalance
in Social Security is a challenging analytical question. The imbalance
is even more difficult to measure in Medicare, which includes both
Hospital Insurance (HI), funded through the payroll tax, and
Supplementary Medical Insurance (SMI), financed through premiums and
general revenues. Under reasonable assumptions, however, each program
embodies 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 both of these programs' financial problems.
[[Page 215]]
------------------------------------------------------------------------
Social Security: The Long-Range Challenge
Social Security provides retirement security and disability insurance for tens of millions of Americans. The
Social Security system 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 within 20 years. Social
Security's spending path is unsustainable under current law. The retirement of the baby-boom generation, born
following World War II, will begin to increase greatly the number of Social Security beneficiaries within five
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 following the baby boomers passage through the system.
The number of workers available to support each beneficiary is projected to decline from over 3 today to just
around 2 in 2030, and remain there indefinitely. This decline in the workforce available to support retiree
benefits means that the Government will not be able to meet current-law benefit obligations at current payroll
tax rates.
The size of Social Security's future shortfall cannot be known with 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, the
demands created by Social Security could compromise the rest of the budget and the Nation's economic health.
The actuarial shortfall is estimated to be $11.9 trillion over an infinite horizon.
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 216]]
------------------------------------------------------------------------
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 Supplemental Medical Insurance (SMI) or Part B, which pays for physicians' services and
other related expenditures. Starting in 2006, Medicare will offer a voluntary prescription drug benefit,
Medicare Part D, which is part of the SMI Trust Fund.
Like Social Security, HI is intended to be self-financing through dedicated taxes. According to the Medicare
Trustees most recent report, the Trust Fund is projected to be depleted in 2019. Looking at the long run, the
Medicare actuaries project a 75-year unfunded promise to Medicare's HI trust fund of around $8.5 trillion (net
present value). However, this measure tells less than half the story because it does not include the deficiency
in Medicare's Part B and Part D programs. The main source of dedicated revenues to the SMI Trust Fund 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 $28.1 trillion. SMI's financing gap is covered by an unlimited tap on general revenues. According
to the Medicare Trustees 2004 report, ``When the Part D program becomes fully implemented in 2006, general
revenue transfers are expected to constitute the largest single source of income to the Medicare program as a
whole--and would add significantly to the Federal Budget pressures.''
This bifurcated trust fund structure finances Medicare as if the program offers two separate, unrelated
benefits, instead of recognizing that Medicare provides integrated, comprehensive health insurance coverage.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 took initial steps to address this
problem and to monitor Medicare's use of general revenues. The Trustees are now required to include a new,
comprehensive fiscal analysis, the Combined Medicare Trust Fund Analysis. This analysis examines the program as
a whole, and signals whether Medicare's reliance on general revenue funding is projected to exceed 45 percent
of total Medicare expenditures at any point in the following six years. Current projections indicate that
Medicare's reliance on general revenues may exceed this threshold as early as 2012. The Administration supports
efforts to integrate Medicare's financing structure and monitor the program's reliance on general revenue
funding, such as a unified Medicare trust fund.
------------------------------------------------------------------------
[[Page 217]]
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
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 value of the Social Security imbalance over the next 75
years was estimated to be $5.2 trillion as of January 1, 2004. The
comparable estimate for Medicare was $28.1 trillion. (The estimates in
Table 13-3 were prepared by the Social Security and Medicare actuaries,
and they are based on the intermediate economic and demographic
assumptions used for the 2004 trustees' reports. These differ in some
respects from the assumptions used for the long-run budget projections
described in the preceding section, but Table 13-3 would still show
large imbalances if the budget assumptions had been used for the
calculations.)
Table 13-3. ACTUARIAL PRESENT VALUES OF BENEFITS IN EXCESS OF FUTURE TAXES AND PREMIUMS Over a 75-Year
Projection Period as of January 1, in Trillions of Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Social Security
Future benefits less future taxes for those age 15 and over...... 9.6 10.5 11.2 11.7 12.6
Future benefits less taxes for those age 14 and under and those -5.8 -6.3 -6.7 -6.8 -7.3
not yet born....................................................
Net present value for past, present and future participants.... 3.8 4.2 4.6 4.9 5.2
----------------------------------------------------------------------------------------------------------------
Medicare
Future benefits less future taxes and premiums for those age 15 9.9 12.5 12.9 15.0 24.6
and over........................................................
Future benefits less taxes and premiums for those age 14 and -0.7 0.3 0.4 0.8 3.4
under and those not yet born....................................
Net present value for past, present and future participants.... 9.2 12.8 13.3 15.8 28.1
----------------------------------------------------------------------------------------------------------------
Social Security and Medicare
Future benefits less future taxes and premiums for those age 15 ....... 23.0 24.1 26.7 37.2
and over........................................................
Future benefits less taxes and premiums for those age 14 and ....... -6.0 -6.3 -6.0 -3.9
under and not yet born..........................................
Net present value for past, present and future participants...... ....... 17.0 17.8 20.7 33.3
----------------------------------------------------------------------------------------------------------------
Addendum:
Actuarial deficiency as a percent of the discounted payroll tax
base:
Social Security.................................................. -1.89 -1.86 -1.87 -1.92 -1.89
Medicare HI...................................................... -1.21 -1.97 -2.02 -2.40 -3.12
----------------------------------------------------------------------------------------------------------------
In Perpetuity as of January 1
----------------------------------------------------------------------------------------------------------------
2004
----------------------------------------------------------------------------------------------------------------
Social Security.................................................... ....... ....... ....... ....... 11.9
Medicare........................................................... ....... ....... ....... ....... 61.9
Social Security and Medicare....................................... ....... ....... ....... ....... 73.8
----------------------------------------------------------------------------------------------------------------
Doing the calculations for a 75-year horizon understates the
deficiencies, because the 75-year actuarial calculations omit the large
deficits that continue to occur beyond the 75th year. The understatement
is significant, even though values in the distant future are discounted
by a large amount. For example, merely adding an additional year to the
estimating period would widen the imbalance for Social Security from
$5.2 trillion to $5.3 trillion. For the latest Social Security and
Medicare trustees' reports, the programs' actuaries have also calculated
the actuarial imbalances in perpetuity. See Table 13-3, which shows how
much these distant benefits add to the programs' imbalances.
The imbalance for Social Security, when estimated on a perpetuity
basis, was $11.9 trillion at the beginning of 2004. This was the amount
that the Government would have had to raise in the private capital
markets to resolve the program's imbalance. It was entirely accounted
for by the benefits due to current workers and beneficiaries. Future
participants do not add to the total, but their contributions do not
significantly reduce it either. If nothing else were to change, the
estimated imbalance would grow every year at approximately the rate of
interest, just as an unpaid debt grows with interest each year it
remains outstanding. For Social Security this would imply an increase of
approximately $600 billion in 2004 and by growing amounts with every
year that the imbalance remains unaddressed. The comparable imbalance in
Medicare is even more staggering at $61.9 trillion. Unlike Social
Security, future participants do add significantly to the Medicare
imbalance, but the exact size of the imbalance is harder to estimate for
Medicare because of greater uncertainty regarding the future growth of
medical costs. If these costs continue to rise faster than GDP,
[[Page 218]]
then inevitably the Medicare program will place an unsustainable burden
on the budget.
Social Security: The current deficiency in Social Security is
essentially due to paying past and current participants more benefits
than they have paid or will pay into the program in taxes (calculated in
terms of present values). By contrast, future participants--those who
are now under age 15 or not yet born--are projected to pay in present
value about $7.3 trillion more over the next 75 years than they will
collect in benefits over that period. Limiting the horizon at 75 years,
however, prevents a full accounting of the expected benefits for these
future participants, since many future participants will pay all of
their lifetime taxes within the 75-year period, while continuing to
receive benefits after the 75th year, while others will pay some taxes
within the 75-year horizon without receiving any benefits until much
later.
Extending the estimates to perpetuity avoids this distortion because
everyone's taxes and benefits are fully included in the calculation and
discounted to the present. Altogether, the far distant benefits,
estimated in perpetuity, add about $6.7 trillion to the imbalance, which
nearly offsets the expected net contribution of $7.3 trillion from
future participants over the next 75 years. In other words, the taxes
that future participants are expected to pay will be large enough to
cover the benefits due them under current law, but not large enough to
cover those benefits plus the benefits promised to current program
participants in excess of the taxes paid by current program
participants.
Medicare: Over the next 75 years, benefits due to current program
participants exceed payroll taxes and premiums by $24.6 trillion in
present value. This is twice as large as the Social Security gap for the
same group. Future participants are also projected to collect more in
benefits than they pay in taxes and premiums, but over the same time
span the gap is much smaller for them, $3.4 trillion. Even so, this
pattern is different from that for Social Security, where future
participants are net contributors over a 75-year horizon. Extending the
horizon to infinity shows that the benefits due future participants will
eventually exceed projected payroll tax receipts and premiums by a much
larger margin. The infinite horizon projections shown at the bottom of
Table 13-3 reveal that total Medicare benefits exceed future taxes and
premiums by $61.9 trillion in present value.
Passage of the Medicare Prescription Drug, Improvement and
Modernization Act added substantially to Medicare's actuarial
deficiency, as can be seen in the 75-year projections in Table 13-3
comparing 2003 with 2004. The legislation also increased private sector
participation and added new fiscal safeguards which may help address
Medicare's financial shortfall, but how large the impact of these
changes will be is uncertain and their effects are not captured in the
figures reported here.
General revenues have covered about 75 percent of SMI program costs
for many years, with the rest being covered by premiums paid by the
beneficiaries. In Table 13-3, 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. From the
standpoint of the Government as a whole, only receipts from the public
can finance expenditures.
A significant portion of Medicare's actuarial 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, waste, and the many of the costs
associated with medical liability claims add needlessly to costs. But
even though the projected increases in Medicare spending are likely to
contribute to longer life-spans and safer treatments, the financial
implications remain the 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, and that
is reflected in the estimates shown in Tables 13-2 and 13-3.
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. The trust fund surpluses could have added to
national saving if debt held by the public had actually been reduced
because of the trust fund accumulations. But it is impossible to know
for sure whether this happened or not.
At the time Social Security or Medicare redeems the debt instruments
in the trust funds to pay benefits not covered by 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, and for that reason, the trust funds are not netted against
future benefits in Table 13-3. The eventual claim on the Treasury is
better revealed by the difference between future benefits and future
taxes or premiums.
In any case, trust fund assets 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 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
[[Page 219]]
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 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.
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 if the savings occurred outside the budget window.
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 long-run 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 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 the
return on investment 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 also contribute to future tax receipts.
To show the importance of these kinds of issues, Table 13-4 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 types of capital, and these contributions are shown separately
in the table. At the same time, the private wealth shown in Table 13-4
can be drawn on by Government to finance future public activities. The
Nation's wealth sets the ultimate limit on the resources currently
available to the Government. Data in this table are especially
uncertain, because of the strong assumptions needed to prepare the
estimates.
The table shows 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--$6.6 trillion. The Federal contribution is down
from 8.8 percent in the mid-1980s and from 11.5 percent in 1960. Much of
this reflects the relative decline in the stock of defense capital,
which has fallen from around 13 percent of GDP in the mid-1980s to under
6 percent in 2004.
Table 13-4. NATIONAL WEALTH
(As of the end of the fiscal year, in trillions of 2004 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Publicly Owned Physical Assets:
Structures and Equipment.................. 2.1 2.4 3.0 3.7 3.9 4.1 4.5 4.9 5.6 5.9 6.1 6.1
Federally Owned or Financed............. 1.2 1.3 1.4 1.6 1.7 1.9 2.0 2.1 2.1 2.2 2.2 2.3
Federally Owned....................... 1.1 1.1 1.1 1.1 1.0 1.2 1.2 1.2 1.1 1.0 1.0 1.1
Grants to State and Local Governments. 0.1 0.2 0.3 0.5 0.7 0.8 0.8 0.9 1.1 1.2 1.2 1.2
Funded by State and Local Governments... 0.9 1.1 1.5 2.1 2.2 2.2 2.5 2.8 3.5 3.7 3.8 3.8
Other Federal Assets...................... 0.7 0.7 0.7 0.9 1.3 1.4 1.2 0.9 1.2 1.2 1.4 1.7
-----------------------------------------------------------------------------------------------------------
Subtotal............................ 2.8 3.1 3.6 4.5 5.2 5.5 5.6 5.8 6.8 7.2 7.5 7.8
Privately Owned Physical Assets:
Reproducible Assets....................... 7.3 8.3 10.2 13.0 16.1 17.5 20.0 22.1 26.7 28.6 29.5 30.5
Residential Structures.................. 2.8 3.3 3.9 5.0 6.4 6.8 7.9 8.9 11.0 12.1 12.7 13.3
Nonresidential Plant & Equipment........ 2.9 3.3 4.1 5.4 6.5 7.4 8.3 9.0 10.9 11.6 11.7 12.0
Inventories............................. 0.7 0.8 0.9 1.2 1.4 1.3 1.4 1.5 1.6 1.5 1.6 1.7
Consumer Durables....................... 0.9 1.0 1.3 1.5 1.8 1.9 2.4 2.7 3.1 3.4 3.4 3.6
Land...................................... 2.1 2.5 2.9 3.8 5.8 6.6 6.8 5.2 7.8 8.9 9.5 11.0
-----------------------------------------------------------------------------------------------------------
Subtotal............................ 9.4 10.9 13.1 16.8 21.9 24.1 26.8 27.3 34.5 37.6 38.9 41.6
Education Capital:
Federally Financed........................ 0.1 0.1 0.2 0.3 0.5 0.6 0.8 0.9 1.2 1.3 1.4 1.4
Financed from Other Sources............... 6.4 8.2 11.0 13.6 17.8 21.4 27.6 30.9 40.1 42.8 44.1 45.0
-----------------------------------------------------------------------------------------------------------
Subtotal............................ 6.5 8.3 11.3 14.0 18.3 22.0 28.4 31.8 41.3 44.1 45.5 46.4
Research and Development Capital:
Federally Financed R&D.................. 0.2 0.4 0.5 0.6 0.6 0.7 0.8 1.0 1.0 1.1 1.1 1.2
R&D Financed from Other Sources......... 0.1 0.2 0.3 0.4 0.5 0.7 0.9 1.2 1.5 1.7 1.8 1.9
-----------------------------------------------------------------------------------------------------------
Subtotal............................ 0.3 0.6 0.8 1.0 1.1 1.4 1.7 2.1 2.6 2.8 2.9 3.0
-----------------------------------------------------------------------------------------------------------
Total Assets................................ 19.0 22.8 28.8 36.3 46.5 53.0 62.6 67.0 85.2 91.7 94.9 98.8
Net Claims of Foreigners on U.S. (+)........ -0.1 -0.2 -0.2 -0.1 -0.4 0.1 0.8 1.6 3.0 3.5 4.1 4.5
Net Wealth.................................. 19.1 23.0 29.0 36.4 46.9 52.9 61.7 65.4 82.1 88.2 90.8 94.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADDENDA:
Per Capita Wealth (thousands of 2004 $)... 106.1 118.5 141.5 168.7 205.6 221.7 246.4 244.9 290.4 305.6 311.5 320.5
Ratio of Wealth to GDP (in percent)....... 703.4 672.4 708.7 785.5 845.8 799.8 797.9 747.9 769.1 803.4 798.7 798.2
Total Federally Funded Capital (trillions 2.2 2.5 2.9 3.4 4.1 4.7 4.8 4.9 5.6 5.8 6.2 6.6
2004 $)..................................
Percent of National Wealth.......... 11.5 10.7 9.9 9.3 8.7 8.8 7.8 7.5 6.8 6.6 6.8 7.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
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, $49.3 trillion in 2004,
consisting of $41.6 trillion in private physical capital and $7.8
trillion in public physical capital (including capital funded by State
and local governments); by comparison, GDP was around $11.7 trillion in
2004. The Federal Government's contribution to this stock of capital
includes its own physical assets of $2.7 trillion plus $1.3 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. Table 13-4 includes an
estimate of the stock of capital represented by the Nation's investment
in formal education and training. The estimate is based on the cost of
replacing the years of schooling embodied in the U.S. population aged 16
and over; in other words, the 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
[[Page 220]]
$46.4 trillion in 2004, of which about 3 percent was financed by the
Federal Government. It was almost 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.
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 total 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
earns 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 $3.0 trillion in 2004. Although this
represents a large amount of research, it is a relatively small portion
of total National wealth. Of this stock, 39 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 13-4 is intended
to show National totals only. Total debt is important even though it
does not appear in Table 13-4. The amount of debt owed by Americans to
other Americans can exert both positive and negative effects on the
economy. Americans' willingness and abil
[[Page 221]]
ity to borrow have helped fuel the current expansion by supporting
consumption and housing purchases. On the other hand, growing debt would
be a risk to future growth, if the ability to service the high level of
debt were to become impaired.
The only debts that do appear in Table 13-4 are the debts Americans
owe to foreigners for the investments that foreigners have made here.
America's net 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 is at record levels, the size of the net
foreign debt remains relatively small compared with the total stock of
U.S. assets. It amounted to 4.5 percent of total assets in 2004.
Federal debt does not appear explicitly in Table 13-4 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 13-1, amount to 5.6 percent of net U.S. wealth as shown in
Table 13-4. 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 2004 was
almost $100 trillion, about eight times the size of GDP. Since 1960, 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 3.0 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. Net wealth has been growing at an
average rate of 4.2 percent since 1995, about the same rate as from 1960
to 1973. 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 29 percent of privately owned physical assets. It grew 3.3
percent per year on average from 1960 to 2004. 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, growth of
plant and equipment over the last eight years accelerated by only a few
tenths of a percentage point compared with 1973-1995. Private plant and
equipment grew 2.9 percent per year on average between 1973 and 1995 and
just 3.2 percent per year from 1995 through 2004. 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 and land have all grown much more rapidly in real value since
1995 than from 1973 to 1995.
The accumulation of education capital has averaged 4.6 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, 1.9 percentage points faster than the
average rate of growth in private physical capital during the same
period. Since 1995, education capital has grown at a 4.3 percent annual
rate. This reflects both the extra resources devoted to schooling in
this period, and the fact that such resources have been increasing in
economic value. Meanwhile, R&D stocks have grown at an average rate of
4.1 percent per year since 1995.
Other Federal Influences on Economic Growth
Federal investment decisions, as reflected in Table 13-4, obviously
are important, but the Federal Government also affects 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 preserving national
security, fostering healthy economic conditions including sound economic
growth, promoting health and social welfare, and protecting the
environment. Table 13-5 offers a rough cut of information that can be
useful in assessing how well the Federal Government has been doing in
promoting the domestic portion of these general objectives.
[[Page 222]]
TABLE 13-5. ECONOMIC AND SOCIAL INDICATORS
--------------------------------------------------------------------------------------------------------------------------------------------------------
Calendar Years 1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
Living Standards:
Real GDP per person (2000 13,840 16,420 18,392 19,961 22,666 25,382 28,429 30,128 34,760 34,953 35,664 36,893
dollars).....................
average annual percent 1.7 3.5 2.3 1.7 2.6 2.3 2.3 1.2 2.9 1.9 1.7 1.7
change (5-year trend)......
Median Income:
All Households (2003 N/A N/A 35,832 35,559 37,447 38,510 40,865 40,845 44,853 43,381 43,318 N/A
dollars)...................
Married Couple Families 30,903 35,966 43,130 44,789 48,917 50,695 54,431 56,395 63,110 62,657 62,405 N/A
(2003 dollars).............
Female Householder, Husband 15,616 17,485 20,889 20,619 22,000 22,267 23,102 23,596 27,462 29,665 29,307 N/A
Absent (2003 dollars)......
Income Share of Lower 60% of 31.8 32.2 32.3 32.0 31.5 30.0 29.4 28.0 27.3 27.1 26.9 N/A
All Households...............
Poverty Rate (%) (a).......... 22.2 17.3 12.6 12.3 13.0 14.0 13.5 13.8 11.3 12.1 12.5 N/A
Economic Security:
Civilian Unemployment (%)..... 5.5 4.5 4.9 8.5 7.1 7.2 5.5 5.6 4.0 5.8 6.0 5.5
CPI-U (% Change).............. 1.7 1.6 5.8 9.1 13.5 3.5 5.4 2.8 3.4 1.6 2.2 2.7
Payroll Employment Increase -0.4 2.9 -0.4 0.4 0.3 2.5 0.3 2.2 1.9 -0.6 -0.1 2.2
Previous 12 Months (millions)
Managerial or Professional N/A N/A N/A N/A N/A 27.3 29.2 32.0 33.8 34.6 34.8 34.9
Jobs (% of civilian
employment)..................
Wealth Creation:
Net National Saving Rate (% of 10.6 12.4 8.3 6.7 7.4 6.2 4.4 4.1 5.9 1.7 1.2 1.6
GDP) (b).....................
Innovation:
Patents Issued to U.S. 42.3 54.1 50.6 51.5 41.7 45.1 56.1 68.2 103.6 104.6 105.9 N/A
Residents (thousands) (c)....
Multifactor Productivity 0.9 2.9 0.8 1.1 0.8 0.5 0.5 0.6 1.1 N/A N/A N/A
(average 5 year percent
change)......................
Nonfarm Output per Hour 1.6 3.4 2.1 2.3 1.1 1.7 1.5 1.5 2.5 3.0 3.4 3.6
(average 5 year percent
change)......................
Environment:
Air Quality:
Nitrogen Oxide Emissions 18,163 21,297 26,883 26,377 27,079 25,757 25,529 24,956 22,598 21,102 N/A N/A
(thousand short tons)......
Sulfur Dioxide Emissions 22,268 26,799 31,218 28,043 25,925 23,307 23,076 18,619 16,347 15,353 N/A N/A
(thousand short tons)......
Lead Emissions (thousand N/A N/A 221 160 74 23 5 4 4 N/A N/A N/A
short tons)................
Water Quality:
Population Served by N/A N/A N/A N/A N/A 140 162 174 201 N/A N/A N/A
Secondary Treatment or
Better (mils)..............
Social:
Families:
Children Living with Mother 9.2 10.2 11.6 16.4 18.6 20.2 21.6 24.0 22.3 23.2 23.2 N/A
Only (% of all children)...
Safe Communities:
Violent Crime Rate (per 160.0 199.0 364.0 482.0 597.0 558.1 729.6 684.5 506.5 494.4 475.0 N/A
100,000 population) (d)....
Murder Rate (per 100,000 5.1 5.1 7.8 9.6 10.2 8.0 9.4 8.2 5.5 5.6 5.7 N/A
population) (d)............
Murders (per 100,000 Persons N/A N/A N/A 4.5 5.9 4.9 9.8 11.0 4.8 4.5 N/A N/A
Age 14 to 17)..............
Health:
Infant Mortality (per 1000 26.0 24.7 20.0 16.1 12.6 10.6 9.2 7.6 6.9 7.0 6.8 6.6
Live Births) (e)...........
Low Birthweight [<2,500 gms] 7.7 8.3 7.9 7.4 6.8 6.8 7.0 7.3 7.6 7.8 7.9 N/A
Babies (%) (e).............
Life Expectancy at birth 69.7 70.2 70.8 72.6 73.7 74.7 75.4 75.8 77.0 77.3 N/A N/A
(years)....................
[[Page 223]]
Cigarette Smokers (% N/A 41.9 39.2 36.3 33.0 29.9 25.3 24.6 23.2 22.4 21.6 20.1
population 18 and older)
(f)........................
Learning:
High School Graduates (% of 44.6 49.0 55.2 62.5 68.6 73.9 77.6 81.7 84.1 84.1 84.6 N/A
population 25 and older)...
College Graduates (% of 8.4 9.4 11.0 13.9 17.0 19.4 21.3 23.0 25.6 26.7 27.2 N/A
population 25 and older)...
Participation:
Individual Charitable Giving 247 296 355 377 410 422 468 444 680 669 N/A N/A
per Capita (2000 dollars)..
(by presidential election year) (1960) (1964) (1968) (1972) (1976) (1980) (1984) (1988) (1992) (1996) (2000) (2004)
Voting for President (% 62.8 61.9 60.9 55.2 53.5 52.8 53.3 50.3 55.1 49.0 51.2 55.3
eligible population).......
--------------------------------------------------------------------------------------------------------------------------------------------------------
(a) The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
(b) 2004 through Q3 only.
(c) Preliminary data for 2003.
(d) Not all crimes are reported, and the fraction that go unreported may have varied over time.
(e) Data for 2003-2004 provisional, data for 2004 through June.
(f) Smoking data for 2004 through June.
The indicators shown in Table 13-5 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 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
beginning around 1995 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,
violent crime has fallen by a third. The turnaround has been especially
dramatic in the murder rate, which has been lower since 1998 than at any
time since the early 1960s. The 2001 recession had an effect on some of
these indicators: unemployment rose and real GDP growth declined for a
time. But as the economy recovered much of the improvement shown in
Table 13-5 was preserved. Indeed, productivity growth, the best
indicator of future changes in the standard of living accelerated. Since
1999, it has increased faster than in any other five-year period since
1960.
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: For the years 2005-2015, 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 interval 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 2004
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.
[[Page 224]]
CPI inflation holds stable at 2.4 percent per year; the
unemployment rate is constant at 5.1 percent; and the yield on
10-year Treasury notes is steady at 5.7 percent.
Real GDP per hour grows at the same average rate as in the
Administration's medium-term projections--2.3 percent per
year.
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 slower rates of
growth beyond that point. Annual population growth eventually
reaches 0.2 percent.
Real GDP growth declines over time with the expected
slowdown in population growth and the increase in the portion
of the population over age 65, which contributes less work
effort. Historically, real GDP has grown at an average yearly
rate of 3.4 percent. In these projections, average real GDP
growth declines to around 2.5 percent per year.
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 2010, receipts and outlays
follow the budget's policy projections. In the long run, 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 2004 Medicare trustees'
report, adjusted for differences in inflation rate and the growth rate
in GDP per capita. Federal pensions are derived from the most recent
actuarial forecasts available at the time the budget is prepared,
repriced using Administration inflation assumptions. Medicaid outlays
are based on the economic and demographic projections in the model.
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 principal 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, it
was necessary to deflate the nominal investment series. This was done
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 estimates based on program data.
Historical data on liabilities for deposit insurance were also drawn
from CBO's study, The Economic Effects of the Savings and Loan Crisis,
issued January 1992.
Pension and Post-Employment Health Liabilities: For 1979-2003, 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 2004 is a projection. The health
insurance liability was estimated by the program actuaries for 1997-
2003, 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.
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 or financed stocks of capital are the Federal investment
flows described in Chapter 6. Federal grants for State and local
government capital are added, together with adjustments for inflation
and depreciation in the same way as described above for direct Federal
investment. Data for total State and local government capital come from
the revised capital stock data prepared by the Bureau of Economic
Analysis extrapolated for 2004.
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 2004 using
in
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vestment 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
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 13-5 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 the
respective agencies' web sites.