[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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                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.

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    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.