[Analytical Perspectives]
[Economic Assumptions and Analyses]
[13. Stewardship]
[From the U.S. Government Printing Office, www.gpo.gov]



[[Page 175]]


 
                            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 give at best a partial 
picture of the Government's financial condition. Indeed, changes in the 
annual budget deficit or surplus can be misleading. For example, the 
temporary shift from annual deficits to surpluses in the late 1990s did 
nothing to correct the long-term fiscal deficiencies in the major 
entitlement programs, which are the major source of the long-run 
shortfall in Federal finances. This would have been more apparent at the 
time if greater attention had been focused on long-term measures such as 
those presented 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.
  For the Federal Government, unfortunately, 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 easily be summed up with a single statistic. Also, even 
though its financial condition is important, the Government is not 
expected to earn a profit. Its financial 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 estimates of the Government's assets and 
          liabilities, which are shown in Table 13-1. This table is 
          similar to a business balance sheet, but for that reason it 
          cannot reveal some of the Government's unique financial 
          features and needs to be supplemented by the information in 
          Parts III and IV.
    Part III shows possible long-run paths for the Federal 
          budget. These projections vary depending on alternative 
          economic and demographic assumptions. The projections are 
          summarized in Table 13-2 and in a related set of charts. Table 
          13-3 shows present value estimates of the funding shortfall in 
          Social Security and Medicare. Together these data indicate the 
          scope of the Government's future responsibilities and the 
          resources it will have available to discharge them under 
          current law and policy. In particular, they show the looming 
          long-run fiscal challenge posed by the Federal entitlement 
          programs.
    Part IV returns the focus to the present. It presents 
          information on national economic and social conditions. The 
          private economy is the ultimate source of the Government's 
          resources. Table 13-4 gives a summary of total national 
          wealth, while highlighting the Federal investments that have 
          contributed to that wealth. Table 13-5 shows trends in wealth 
          and Table 13-6 presents a small sample of statistical 
          indicators.

            PART I--A FRAMEWORK TO EVALUATE FEDERAL FINANCES

  No single framework can encompass all of the factors that affect the 
financial condition of the Federal Government, but the framework 
presented here is reasonably comprehensive and it offers a useful way to 
examine the financial implications of Federal policies. This framework 
includes balance-sheet information, but it also includes long-run 
projections of the entire budget showing where future fiscal strains are 
most likely to appear. It includes measures of national wealth, which 
support future income and tax receipts, and an array of economic and 
social indicators showing potential pressure points that may require 
future policy responses.
  The Government's legally binding obligations--its liabilities--consist 
in the first place of Treasury debt. Other liabilities include the 
pensions and medical 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. The liabilities 
and assets are collected in Table 13-1. The liabilities shown in Table 
13-1 are only a subset of the Government's overall financial 
responsibilities. Indeed, the full extent of the Government's fiscal 
exposure through programmatic commitments dwarfs the outstanding total 
of all acknowledged Federal liabilities. The commitments to Social 
Security and Medicare alone amount to many times the value of Federal 
debt held by the public.

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  In addition to Social Security and Medicare, the Government has a 
broad range of programs that dispense cash and other benefits to 
individual recipients. A few examples of such programs are Medicaid, 
food stamps, veterans' pensions and health care. The Government also 
provides a wide range of public services that must be financed through 
the tax system. It is true that specific programs may be modified or 
even ended at any time by the Congress and the President, and changes in 
the laws governing these programs are a regular part of the legislative 
cycle. For this reason, these programmatic commitments do not constitute 
``liabilities'' in a legal or accounting sense, and they would not 
appear on a balance sheet. They are Federal responsibilities, however, 
and will have a claim on budgetary resources for the foreseeable future. 
All of the Government's existing 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 have been acquired through 
various credit programs. They also include the plant and equipment used 
to produce Government services. The Government also owns a substantial 
amount of land. Such assets would normally be shown on a balance sheet. 
The Government also has resources in addition to those that might 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 most 
revealing 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 of the Government 
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 have contributed to the goal of providing more information 
about Government programs and will permit a closer alignment of the cost 
of programs with performance measures. These changes have been described 
in detail in previous Budgets. They are reviewed in chapter 2 of this 
volume, and in the accompanying material that describes results obtained 
with the Program Assessment Rating Tool (PART). This Stewardship chapter 
complements the detailed exploration of Government performance with an 
assessment of the overall impact of Federal policy as reflected in 
general measures of economic and social well-being, shown in Table 13-6.

                   Relationship with FASAB Objectives

  The framework presented here meets the stewardship objective 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\
---------------------------------------------------------------------------
  \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. .
---------------------------------------------------------------------------
          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 Financial 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. The Report, however, does not extend that 
review to the condition or sustainability of the Government as a whole, 
which is a main focus of this chapter, and it does not try to relate the 
Government's assets and liabilities to private wealth or broader 
economic and social conditions.
  Connecting the Dots: The presentation that follows is constructed 
around a series of tables and charts. 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

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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 that would even cover all
                its expenses. The Government undertakes these activities
                not to improve its balance sheet, but to benefit the
                Nation.
 
               For example, the Government invests in education and
                research, but it earns no direct return from these
                investments. People are enriched by these investments,
                but the returns do not show up as an increase in
                Government assets rather 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 Table 13-1 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, will 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.
 
               Private financial markets clearly recognize this reality.
                The Federal Government's implicit credit rating is among
                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
 
 
------------------------------------------------------------------------
3.  Why are Social Security and Medicare not shown as Government
 liabilities in Table 13-1?
 
               Future Social Security and Medicare benefits may be
                considered as promises or responsibilities of the
                Federal Government, but these benefits are not a
                liability in a legal or accounting sense. The Government
                has unilaterally decreased as well as increased these
                benefits in the past, and future reforms could alter
                them again. These benefits are reflected in this
                presentation of the Government's finances, but they are
                shown elsewhere than in Table 13-1. They appear in two
                ways: as part of the overall budget projections in Table
                13-2, and in 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 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.
 
               Also, if Social Security and Medicare benefits were
                treated as liabilities, then payroll tax receipts
                earmarked to finance those benefits ought to be treated
                as assets. This treatment would be essential to gauge
                the size of the future claim. Tax receipts, however, are
                not generally considered to be Government assets, and
                for good reason: the Government does not own the wealth
                on which future taxes depend. 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 benefits. 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 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
 
 
------------------------------------------------------------------------
5.  When the baby boom generation retires, the deficit could become much
 larger than it ever was before. How is this reflected in the current
 evaluation of the Government's financial condition?
 
               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.  Does it make sense for the Government to finance needed capital by
 borrowing, which would permit a deficit in the budget, so long as the
 borrowing did not exceed the amount spent on investments?
 
               This rule might not permit much extra borrowing. Even if
                the Government financed new capital by borrowing, it
                would need to pay off the debt incurred in this way as
                the capital was used up. Only the net investment the
                Government does after subtracting capital consumption
                would be financed with a net increase in borrowing. As
                discussed in Chapter 6, recently Federal net investment
                in physical capital has not been very large and
                occasionally it 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,
                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 2005 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, real 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 
77 percent greater than it was in 1960. Meanwhile, Federal liabilities 
have increased by 244 percent in real terms. The decline in the Federal 
net asset position has been partly due 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 large increases in 
health benefits promised 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. Currently, the 
net excess of liabilities over assets is about $5.7 trillion or about 
$19,000 per capita. As a ratio to GDP, the excess of liabilities over 
assets reached a peak of 52 percent in 1993; it declined to 38 percent 
in 2000; it rose to 46 percent in 2003; and it has declined slightly 
since then to around 45 percent of GDP at the end of 2005. The average 
since 1960 has been 36 percent (see Table 13-1).

                                                     Table 13-1.  GOVERNMENT ASSETS AND LIABILITIES*
                                             (As of the end of the fiscal year, in billions of 2005 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          1960     1965     1970     1975     1980     1985     1990      1995      2000      2003      2004      2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
                ASSETS
Financial Assets:
  Cash and Checking Deposits..........       46       67       42       34       52       34        46        47        63        56        56        23
  Other Monetary Assets...............        2        1        1        1        2        2         2         1         7        10         2         2
  Mortgages...........................       30       29       43       45       83       85       108        75        86        78        76        76
  Other Loans.........................      111      152      190      190      247      320       227       174       145       124       121       117
    less Expected Loan Losses.........       -1       -3       -5      -10      -19      -19       -21       -27       -42       -50       -48       -41
  Other Treasury Financial Assets.....       67       84       73       66       93      137       219       263       240       326       320       338
                                       -----------------------------------------------------------------------------------------------------------------
      Subtotal........................      254      330      344      326      458      559       580       543       572       645       623       608
 
Nonfinancial Assets:
  Fixed Reproducible Capital:.........    1,112    1,104    1,148    1,114    1,055    1,193     1,237     1,244     1,091     1,072     1,079     1,106
    Defense...........................      959      901      910      832      747      868       891       870       712       674       680       697
    Nondefense........................      153      203      238      282      308      325       346       373       379       398       399       408
  Inventories.........................      291      252      235      210      259      297       263       202       208       255       269       272
  Nonreproducible Capital.............      471      483      463      686    1,100    1,179       931       701     1,043     1,220     1,434     1,774
    Land..............................      102      142      179      283      361      375       386       293       448       535       611       729
    Mineral Rights....................      369      342      285      404      739      804       545       408       595       684       823     1,045
                                       -----------------------------------------------------------------------------------------------------------------
      Subtotal........................    1,874    1,839    1,846    2,010    2,414    2,668     2,431     2,147     2,342     2,546     2,782     3,152
                                       -----------------------------------------------------------------------------------------------------------------
Total Assets..........................    2,128    2,169    2,190    2,336    2,872    3,228     3,012     2,690     2,914     3,191     3,406     3,760
 
              LIABILITIES
 
Debt held by the Public...............    1,269    1,305    1,161    1,180    1,467    2,426     3,306     4,394     3,826     4,133     4,418     4,590
 
Insurance and Guarantee Liabilities:
  Deposit Insurance...................  .......  .......  .......  .......        2       10        80         5         1         1         1         1
  Pension Benefit Guarantee...........  .......  .......  .......       48       35       48        48        23        45        75        91        82
  Loan Guarantees.....................        *        1        3        7       14       12        17        33        42        38        44        48
  Other Insurance.....................       35       31       24       22       30       18        22        20        18        17        16        16
                                       -----------------------------------------------------------------------------------------------------------------
    Subtotal..........................       35       32       27       77       81       89       167        81       106       131       152       147
 
Pension and Post-Employment Health
 Liabilities:
  Civilian and Military Pensions......      958    1,205    1,440    1,632    2,051    2,035     1,989     1,928     1,978     2,038     2,127     2,169
  Retiree Health Insurance Benefits...      225      283      338      383      481      477       467       452       438       980     1,020     1,125
  Veterans Disability Compensation....      211      265      317      351      360      297       268       293       620     1,008       951     1,123
                                       -----------------------------------------------------------------------------------------------------------------
    Subtotal..........................    1,394    1,752    2,095    2,366    2,892    2,809     2,723     2,673     3,036     4,026     4,098     4,416
 
Other Liabilities:
  Trade Payables and Miscellaneous....       30       37       47       59       91      119       164       136       111       170       179       183
  Benefits Due and Payable............       23       27       37       39       49       55        65        76        87       106       106       117
                                       -----------------------------------------------------------------------------------------------------------------
    Subtotal..........................       53       64       84       98      140      174       229       212       198       276       285       301
 
Total Liabilities.....................    2,751    3,153    3,366    3,721    4,580    5,498     6,425     7,359     7,166     8,566     8,952     9,454
 
Net Assets (Assets Minus Liabilities).     -623     -985   -1,176   -1,385   -1,708   -2,270    -3,414    -4,669    -4,253    -5,376    -5,547    -5,694
--------------------------------------------------------------------------------------------------------------------------------------------------------
Addenda:
 
Net Assets Per Capita (in 2005           -3,452   -5,076   -5,744   -6,422   -7,488   -9,506   -13,622   -17,489   -15,037   -18,445   -18,846   -19,163
 dollars).............................
Ratio to GDP (in percent).............    -22.1    -27.8    -27.8    -28.9    -29.7    -33.1     -42.6     -51.5     -38.4     -45.9     -45.6     -45.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* This table shows assets and liabilites for the Government as a whole excluding the Federal Reserve System. Data for 2005 are extrapolated in some
  cases.

                                 Assets

  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 2005. 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

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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 yearend 2005. 
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 $1.1 trillion in constant dollars for 
most of the last 45 years (OMB estimate). This capital consists of 
defense equipment and structures, including weapons systems, as well as 
nondefense capital goods. Currently, less than two-thirds of the capital 
is defense equipment or structures. In 1960, defense capital was over 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 Government also holds inventories of defense 
goods and other items that in 2005 amounted to about 25 percent of the 
value of its fixed capital.
   Nonreproducible 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,

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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 substantially in 2002-2005. These 
fluctuations have caused the estimated value of Federal mineral deposits 
to fluctuate as well. In 2005 as estimated here, the combined real value 
of Federal land and mineral rights was higher than it has ever been, but 
only 30 percent greater than in 1982. These estimates omit some valuable 
assets owned by the Federal Government, such as works of art and 
historical artifacts partly because such unique assets are unlikely ever 
to be sold and partly because there is no comprehensive inventory or 
realistic basis for valuing them.
   Total Assets: The total value of Government assets measured in 
constant dollars has risen sharply in the past three years, and was 
higher in 2005 than ever before. The Government's asset holdings are 
vast. As of the end of 2005, Government assets were estimated to be 
worth about $3.8 trillion or 30 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 including 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 promised 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. 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 
financial liability is the debt owed to the public. It amounted to about 
$4.6 trillion at the end of 2005. Publicly held debt declined for 
several years in the late 1990s because of the unified budget surpluses 
that emerged at that time, but as deficits returned, publicly held debt 
began 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 2005.
   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 $4.4 trillion at the end of 2005 up from $3.0 trillion in 2000. 
\2\ There was a large expansion in Federal military retiree health 
benefits legislated in 2001.
---------------------------------------------------------------------------
  \2\ Estimates of these liabilities were derived from the 2005 
Financial Report of the United States Government and Reports from 
earlier years. Values for some prior years were extrapolated. .
---------------------------------------------------------------------------

                     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 levels in 45 
years, and in 2004-2005 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.

[[Page 184]]

                  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 also important to anticipate what future budgetary requirements might 
flow from current laws and policies. Despite the uncertainty surrounding 
the assumptions needed for such estimates, 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 expected 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, cannot 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 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. These 
uncertainties make even short-run budget forecasting quite difficult, 
and the uncertainties increase the further into the future projections 
are extended. While uncertainty makes forecast accuracy difficult to 
achieve, it enhances the importance of long-run budget projections 
because people are risk averse. It is not possible to assess the 
likelihood of future risks without projections. A full treatment of all 
the relevant risks is beyond the scope of this chapter, but the chapter 
does show how long-run budget projections respond to changes in some of 
the key economic and demographic parameters. Given the uncertainties, a 
useful first step 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. Three years later, they will 
turn 65 and become eligible for Medicare. In the years that follow, the 
elderly population will steadily increase, 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. From 
that point forward, because of lower fertility and improved mortality, 
the ratio is expected to continue to decline slowly. With fewer workers 
to pay the taxes needed to support the retired population, budgetary 
pressures will continue to grow. The problem posed by the demographic 
transition is a permanent one.
  Currently, the three major entitlement programs--Social Security, 
Medicare and Medicaid--account for 43 percent of non-interest Federal 
spending, up from 30 percent in 1980. By 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, in 2080, the figure rises to around three-
quarters of non-interest spending. In other words, under an extension of 
current-law formulas, almost all of the budget, aside from interest, 
would go to these three programs alone. To say the least, that would 
severely reduce the flexibility of the budget, and the Government's 
ability to respond to new challenges.

                          An Unsustainable Path

  These long-run budget projections show clearly that the budget is on 
an unsustainable path, although the rise in the deficit unfolds 
gradually. The budget deficit is projected to decline as the economy 
expands over the next several years, while most of the baby boomers 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. Without reforms, by the end of this 
chapter's projection period in 2080, rising deficits would have driven 
publicly held Federal debt to levels well above the previous peak level 
relative to GDP reached at the end of World War II. Long before that 
point is ever reached there is likely to be a crisis that will force 
budgetary changes, but the tim

[[Page 185]]

ing of the crisis and its resolution are impossible to predict.
  The revenue projections start with the budget's estimate of receipts 
under the Administration's proposals. In the long run, receipts are 
assumed to increase as people's real incomes rise. The income tax is 
indexed for inflation, but not for real growth, so as real incomes rise, 
the effective income rate increases. This tendency is partly offset 
because many excise taxes are not indexed and therefore tend to decline 
in real terms as inflation pushes up the price level. Furthermore, 
payroll taxes are based on cash wages and the share of cash wages in 
total compensation and in overall GDP has been declining as workers 
receive a larger share of their compensation in the form of untaxed 
fringe benefits. These offsetting tendencies are not powerful enough, 
however, to prevent the overall tax share from rising somewhat in the 
long run. In the projections summarized in Table 13-2, the ratio of 
receipts to GDP rises to around 22 percent by the end of the 75-year 
period.\3\
---------------------------------------------------------------------------
  \3\ The Alternative Minimum Tax is also scheduled to take a growing 
share of income under current law, because its parameters are not 
indexed to inflation. That increase is not assumed to continue in these 
projections because it would imply a fundamental change in the tax 
system.
---------------------------------------------------------------------------
  In the past, these long-run budget projections have jumped off from 
the end point for the current budget. This year's Budget includes the 
effects of adding personal retirement accounts to Social Security. 
Personal accounts are one element within a set of larger reforms that 
would restore solvency to Social Security. The Administration has not 
yet specified a complete set of reforms to achieve solvency. Within the 
current budget horizon, these other reforms would not have significant 
budget effects. In the long range, however, their effects would be 
significant. Because these other reforms are not yet specified, the 
long-range projections shown here do not incorporate personal retirement 
accounts. Showing the personal account proposal in isolation would give 
a distorted picture of the budget effects of comprehensive Social 
Security reform.
  The long-run budget outlook is highly uncertain (see the technical 
note at the end of this chapter for a further 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 
clearly 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-RUN BUDGET PROJECTIONS
                      (receipts, outlays, surplus or deficit, and debt as a percent of GDP)
----------------------------------------------------------------------------------------------------------------
                                           1980    1990    2000    2010    2020    2030    2040    2060    2080
----------------------------------------------------------------------------------------------------------------
 
Receipts................................    19.0    18.0    20.9    17.9    18.9    19.4    20.0    21.3    22.4
 
Outlays:
  Discretionary.........................    10.1     8.7     6.3     6.1     5.6     5.6     5.6     5.6     5.6
  Mandatory:
    Social Security.....................     4.3     4.3     4.2     4.2     4.9     5.8     5.9     6.1     6.4
    Medicare............................     1.1     1.7     2.0     2.8     3.7     5.0     6.1     7.9    10.4
    Medicaid............................     0.5     0.7     1.2     1.5     1.9     2.1     2.3     2.8     3.3
    Other...............................     3.7     3.2     2.4     2.3     1.9     1.6     1.4     1.1     0.9
                                         -----------------------------------------------------------------------
      Subtotal, mandatory...............     9.6     9.9     9.8    10.8    12.4    14.4    15.7    17.8    21.0
 
  Net Interest..........................     1.9     3.2     2.3     1.9     1.4     1.5     2.3     4.7     9.4
                                         -----------------------------------------------------------------------
    Total outlays.......................    21.7    21.8    18.4    18.9    19.4    21.6    23.6    28.2    36.1
 
Surplus or Deficit (-)..................    -2.7    -3.9     2.4    -1.0    -0.6    -2.2    -3.6    -6.9   -13.7
 
Primary Surplus or Deficit (-)..........    -0.8    -0.6     4.7     0.9     0.9    -0.6    -1.3    -2.1    -4.2
 
Federal Debt Held by the Public.........    26.1    42.0    35.1    37.5    26.2    28.8    43.3    88.6   177.4
----------------------------------------------------------------------------------------------------------------
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 detailed programmatic estimates in the Budget. It was designed to produce long-range forecasts
  based on additional assumptions regarding 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, Technical, and Policy 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. They generally 
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 2005 Medicare 
Trustees' Report that include the effects of the Medicare Prescription 
Drug and Modernization bill enacted in 2003.\4\ Following the 
recommendations of its Technical Review Panel, the Medi

[[Page 186]]

care 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.
---------------------------------------------------------------------------
  \4\ The long-run projections do not incorporate the Administration's 
proposal for automatic spending reductions in Medicare if the program's 
future reliance on general revenues exceeds the threshold of 45 percent 
of expenditures established in the Medicare Modernization Act. This 
proposal is intended to encourage Congress and the President to reach 
agreement on reforms to slow Medicare spending to bring it back in line 
with the 45 percent threshold. Assuming that these automatic reductions 
would continue each year throughout the 75-year projection period would 
result in an unrealistic projection of Medicare spending.
---------------------------------------------------------------------------
  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.


  2. Discretionary Spending: The projection of 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 along with the projected rise in tax revenue produces a small 
budget surplus. Even in this case, the entitlement problem is not solved 
but the threat to the budget is postponed for several decades.

[[Page 187]]






  3. A Constant Revenue Share: In the base projection, individual income 
tax receipts gradually rise over time relative to GDP. This increase 
reflects the higher marginal tax rates that people face as their real 
incomes rise. Eventually, these higher rates would bring the ratio of 
receipts to GDP to unprecedented levels--22 percent after 75 years. 
Alternatively, receipts might be expected to hold within some long-run 
historical range.

[[Page 188]]

 Over the last 40 years, for example, receipts have averaged 18.2 
percent of GDP. Tax receipts have risen above this ratio from time to 
time, most recently at the end of the 1990s, but those periods of high 
taxes have always been followed by tax changes that have restored the 
average tax ratio. Although such changes require legislation and so are 
not implied by current law, a plausible alternative is to hold the 
receipts ratio constant relative to GDP. In that case, the deficit rises 
somewhat faster than in the base assumptions.
  4. Productivity: The rate of future productivity growth has a major 
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 spending rises 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, growth in real GDP per hour 
averaged 2.2 percent per year from 1948 through 1973 and again from 1995 
through 2004. It has grown 2.6 percent per year since 2000, and the 
projections here assume that real GDP per hour will grow at a 2.3 
percent annual rate. 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. 


  5. 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 189]]

          
          

    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.
          
          

[[Page 190]]

    Mortality is projected to decline, i.e., people are expected 
          to live longer. The average female lifespan is projected to 
          rise from 79.6 years in 2004 to 85.2 years by 2080, and the 
          average male lifespan is projected to increase from 74.6 years 
          in 2004 to 81.7 years by 2080. A technical panel to the Social 
          Security Trustees recently reported that the improvement in 
          longevity might even be greater. 
          
          
         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 
may be 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, and 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 191]]

                                     

------------------------------------------------------------------------

                                    Social Security: The Long-Range Challenge
 
 
 
Social Security provides financial security for the elderly, the disabled, and survivors. 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 12 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 3.3 today to 2.2 in
 2030, and to continue to decline slowly from there. 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 $12.8 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 total
 payroll taxes (including the employer's portion, which most economists believe is ultimately 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 after adjusting revenues to keep the
 system solvent, a typical worker born in 2000 would receive a 1.5 percent rate of return instead of a 1.7
 percent rate of return.
 
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 budget
 includes the estimated impact from the creation of personal accounts, funded through the Social Security
 payroll tax. The Administration has also embraced the concept of progressive indexing, which would
 significantly contribute to the solvency of the system by partially indexing the growth of benefits for higher-
 wage workers to inflation rather than wage growth.
 

------------------------------------------------------------------------

[[Page 192]]



                                     

------------------------------------------------------------------------

                                        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 this year, Medicare offers 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 2020. Looking at the long run, the
 Medicare actuaries project a 75-year unfunded promise to Medicare's HI trust fund of around $8.6 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 $29.9 trillion. SMI's financing gap is covered by an unlimited tap on general revenues. According
 to the Medicare Trustees 2005 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 MMA took an important first step toward improving Medicare sustainability by requiring the Medicare
 Trustees' Report to include a new, comprehensive fiscal analysis of the program's financing and issue a warning
 if this analysis projects that the share of Medicare expenditures funded through general revenue funding
 exceeds 45 percent. However, while this warning requires the President to propose legislation to restore
 Medicare spending to sustainable levels, it does not mandate congressional action.
 
The Budget proposes to strengthen the MMA provision by modestly slowing the rate of Medicare growth if the MMA
 threshold is exceeded. The lower growth would be achieved through a four-tenths of a percent reduction to all
 payments beginning the year the threshold is exceeded. The change would only take effect if the President and
 Congress fail to agree on legislation to bring Medicare spending back into line with the threshold established
 by the MMA. The reduction would grow by four-tenths of a percent every year the shortfall continues to occur.
 This proposal would improve Medicare's sustainability by slowing the rate of growth in spending.
 
 

------------------------------------------------------------------------
   The Social Security and Medicare Trustees' Projections: 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''; 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. More 
recently, the trustees' reports have also included a projection of the 
deficiency in perpetuity. This is the clearest way to see the imbalances 
in both programs.
  The present value of the Social Security imbalance over the next 75 
years was estimated to be $5.7 trillion as of January 1, 2005. The 
comparable estimate for Medicare was $29.9 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 2005 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.) 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 $5.7 trillion to $5.8 trillion. Since 2004, the 
Social Security and Medicare actuaries have also presented the actuarial 
imbalances calculated in perpetuity without assuming a fixed horizon. 
Table 13-3 shows how much these distant benefits add to the programs' 
imbalances. For Social Security, the imbalance in perpetuity is $12.8 
trillion and for Medicare it is a staggering $68.4 trillion as of 
January 1, 2005.

[[Page 193]]

  The imbalance estimated on a perpetuity basis is the amount that the 
Government would have to raise in the private capital markets to resolve 
the program's imbalance permanently (given current assumptions). If 
nothing else changes, the estimated imbalance will 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 
implies an increase of approximately $600 billion in 2005 and growing 
amounts with every year that the imbalance remains unaddressed. The 
comparable imbalance in Medicare is much larger than the Social Security 
imbalance. The exact size of the imbalance is harder to estimate for 
Medicare because of greater uncertainty regarding the future growth of 
medical costs.
   Social Security: The current deficiency in Social Security is 
essentially due to the fact that past and current participants will 
receive more benefits than they have paid for with 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 $0.8 trillion more than they will collect in benefits. This 
can be seen by comparing the total deficiency in perpetuity, $12.8 
trillion, with the excess of benefits over taxes for current program 
participants, $13.6 trillion, from Table 13-3. 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: Extending the horizon to infinity shows that the benefits 
due future participants will eventually exceed projected payroll tax 
receipts and premiums by a huge margin. The infinite horizon projections 
shown at the top of Table 13-3 reveal that total Medicare benefits 
exceed future taxes and premiums by $68.4 trillion in present value. 
This is due to an expected excess of benefits over taxes for current 
participants over their lifetimes, but also for future generations. 
Unlike Social Security, the imbalance is not simply the inherited result 
of a pay-as-you-go program that was never fully funded, and which faces 
a demographic crunch. That is part of the problem, but even more 
fundamental is the assumption that medical costs continue to rise in 
excess of general inflation so that medical spending increases in 
proportion to total output in the economy.
  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.

                                     

                                Table 13-3.  ACTUARIAL PRESENT VALUES OF BENEFITS IN EXCESS OF FUTURE TAXES AND PREMIUMS
--------------------------------------------------------------------------------------------------------------------------------------------------------
              In Perpetuity as of January 1, in Trillions of Dollars                                                                      2004     2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
Social Security...................................................................  ...........  ...........  ...........  ...........     11.9     12.8
Medicare..........................................................................  ...........  ...........  ...........  ...........     61.9     68.4
Social Security and Medicare......................................................  ...........  ...........  ...........  ...........     73.8     81.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
     Over a 75-Year Projection Period as of January 1, in Trillions of Dollars           2000         2001         2002         2003       2004     2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
Social Security
  Future benefits less future taxes for those age 15 and over.....................        9.6         10.5         11.2         11.7       12.6     13.6
  Future benefits less taxes for those age 14 and under and those not yet born....       -5.8         -6.3         -6.7         -6.8       -7.3     -7.9
    Net present value for past, present and future participants...................        3.8          4.2          4.6          4.9        5.2      5.7
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Medicare
  Future benefits less future taxes and premiums for those age 15 and over........        9.9         12.5         12.9         15.0       24.6     26.3
  Future benefits less taxes and premiums for those age 14 and under and those not       -0.7          0.3          0.4          0.8        3.4      3.6
   yet born.......................................................................
    Net present value for past, present and future participants...................        9.2         12.8         13.3         15.8       28.1     29.9
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Social Security and Medicare
  Future benefits less future taxes and premiums for those age 15 and over........  ...........       23.0         24.1         26.7       37.2     39.9
  Future benefits less taxes and premiums for those age 14 and under and not yet    ...........       -6.0         -6.3         -6.0       -3.9     -4.3
   born...........................................................................
  Net present value for past, present and future participants.....................  ...........       17.0         17.8         20.7       33.3     35.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Addendum:
Actuarial deficiency as a percent of the discounted payroll tax base:
  Social Security.................................................................      -1.89        -1.86        -1.87        -1.92      -1.89    -1.92
  Medicare HI.....................................................................      -1.21        -1.97        -2.02        -2.40      -3.12    -3.09
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 194]]

  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 excessive 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 fact that a special 
account or 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 
had they been saved.
   The Importance of Long-Run Measures in Evaluating Policy Changes: 
Consider a proposed policy change in which payroll taxes paid by younger 
workers were reduced by $100 this year while the expected present value 
of these workers' future retirement benefits were also reduced by $100. 
The present 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

[[Page 195]]

asset, even though these investments 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 
generates future income and tax receipts, which finance future public 
activities. The Nation's wealth sets the ultimate limit on the resources 
available to the Government. 

                                                              Table 13-4.  NATIONAL WEALTH
                                            (As of the end of the fiscal year, in trillions of 2005 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                1960     1965     1970     1975     1980     1985     1990     1995     2000     2003     2004     2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
                   ASSETS
Publicly Owned Physical Assets:
  Structures and Equipment..................      2.2      2.5      3.1      3.8      4.0      4.3      4.7      5.1      5.8      6.3      6.5      6.4
    Federally Owned or Financed.............      1.3      1.3      1.5      1.6      1.7      2.0      2.1      2.2      2.2      2.3      2.4      2.4
      Federally Owned.......................      1.1      1.1      1.1      1.1      1.1      1.2      1.2      1.2      1.1      1.1      1.1      1.1
      Grants to State and Local Governments.      0.2      0.2      0.3      0.5      0.7      0.8      0.9      1.0      1.1      1.2      1.3      1.3
    Funded by State and Local Governments...      0.9      1.1      1.6      2.1      2.3      2.3      2.5      2.9      3.6      4.0      4.2      4.0
  Other Federal Assets......................      0.8      0.7      0.7      0.9      1.4      1.5      1.2      0.9      1.3      1.5      1.7      2.0
                                             -----------------------------------------------------------------------------------------------------------
      Subtotal..............................      2.9      3.2      3.8      4.7      5.4      5.7      5.8      6.0      7.1      7.8      8.2      8.5
 
Privately Owned Physical Assets:
  Reproducible Assets.......................      7.5      8.6     10.6     13.5     17.6     18.6     21.1     23.4     28.4     31.0     32.6     33.6
    Residential Structures..................      2.9      3.4      4.0      5.2      7.0      7.3      8.3      9.5     11.8     13.6     14.5     15.2
    Nonresidential Plant & Equipment........      3.0      3.4      4.3      5.6      7.2      7.9      8.8      9.6     11.6     12.2     12.7     12.9
    Inventories.............................      0.7      0.8      1.0      1.2      1.5      1.4      1.5      1.5      1.7      1.6      1.7      1.8
    Consumer Durables.......................      0.9      1.0      1.3      1.5      1.8      2.0      2.6      2.9      3.3      3.5      3.6      3.7
  Land......................................      2.2      2.6      3.0      3.9      6.0      6.9      7.1      5.4      8.2      9.8     11.2     13.4
                                             -----------------------------------------------------------------------------------------------------------
      Subtotal..............................      9.7     11.3     13.6     17.4     23.6     25.4     28.2     28.8     36.7     40.8     43.8     47.0
 
Education Capital:
  Federally Financed........................      0.1      0.1      0.3      0.4      0.5      0.6      0.8      1.0      1.3      1.4      1.5      1.6
  Financed from Other Sources...............      6.3      8.5     11.4     14.3     18.2     21.3     26.4     31.0     40.0     44.0     45.5     46.6
                                             -----------------------------------------------------------------------------------------------------------
    Subtotal................................      6.4      8.6     11.6     14.7     18.8     22.0     27.2     32.0     41.3     45.4     47.0     48.1
 
Research and Development Capital:
  Federally Financed R&D....................      0.2      0.4      0.5      0.6      0.6      0.7      0.9      1.0      1.1      1.2      1.2      1.2
  R&D Financed from Other Sources...........      0.1      0.2      0.3      0.4      0.5      0.7      0.9      1.2      1.6      1.9      1.9      2.0
                                             -----------------------------------------------------------------------------------------------------------
    Subtotal................................      0.3      0.6      0.8      1.0      1.2      1.4      1.8      2.2      2.7      3.0      3.1      3.3
                                             -----------------------------------------------------------------------------------------------------------
Total Assets................................     19.4     23.7     29.8     37.8     48.9     54.6     63.1     69.0     87.7     97.1    102.2    106.9
 
Net Claims of Foreigners on U.S. (+)........     -0.1     -0.2     -0.2     -0.1     -0.4      0.1      0.8      1.6      3.1      4.1      4.3      5.5
 
Net Wealth..................................     19.5     23.8     30.0     37.9     49.3     54.5     62.2     67.4     84.6     92.9     97.9    101.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  ADDENDA:
Per Capita Wealth (thousands of 2005 $).....    108.1    122.9    146.3    175.8    216.0    228.3    248.3    252.6    299.2    318.9    332.5    341.4
Ratio of Wealth to GDP (in percent).........    691.4    673.1    707.2    789.8    857.7    794.9    776.0    744.5    764.6    793.6    805.0    805.0
Total Federally Funded Capital (trillions         2.3      2.6      3.0      3.5      4.3      4.8      5.0      5.1      5.8      6.4      6.8      7.3
 2005 $)....................................
    Percent of National Wealth..............     11.7     10.7      9.9      9.3      8.7      8.9      8.0      7.6      6.9      6.9      6.9      7.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

  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: $7.3 trillion. The Federal contribution is down 
from 8.9 percent in the mid-1980s and from 11.7 percent in 1960. Much of 
this reflects the relative decline in the stock of defense capital, 
which has fallen from around 34 percent of GDP in 1960 to under 6 
percent in 2005.
   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, $55.5 trillion in 2005, 
consisting of $47.0 trillion in private physical capital and $8.5 
trillion in public physical capital (including capital funded by State 
and local governments); by comparison, GDP was around $12 trillion in 
2005. The Federal Government's contribution to this stock of capital 
includes its own physical assets of $3.1 trillion plus $1.3 trillion in 
accumulated grants to State and local governments for capital projects. 
The Federal Government has financed about one-quarter of all 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

[[Page 196]]

the years of schooling embodied in the U.S. population aged 15 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 the 
original cost). This is more meaningful economically than the historical 
cost of schooling, and is comparable to the methods used to estimate the 
physical capital stocks 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 
$48.1 trillion in 2005, of which about 3 percent was financed by the 
Federal Government. It was approximately equal in value to the Nation's 
private 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 would be 
two times the estimated value of physical capital if human capital 
earned a similar rate of return to other forms of capital. Thus, the 
estimates offered here are in a sense conservative, because they reflect 
only the costs of acquiring formal education and training, which is why 
they are referred to as education capital rather than human capital. 
They constitute that part of total 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 $3.3 trillion in 2005. Although this 
represents a large amount of research, it is a relatively small portion 
of total National wealth. Of this stock, 38 percent was funded by the 
Federal Government.
---------------------------------------------------------------------------
  \3\ R&D depreciates in the sense that the economic value of applied 
research and development tends to decline with the passage of time, as 
still newer ideas move the technological frontier.
---------------------------------------------------------------------------
   Liabilities: When considering how much the United States owes as a 
Nation, the debts that Americans owe to one another cancel out. When the 
debts of one American are the assets of another American, these debts 
are not a net liability of the Nation as a whole. Table 13-4 only shows 
National totals. Gross 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 ability to borrow have helped fuel the current expansion 
by supporting consumption and housing purchases. On the other hand, 
growing debt could be a risk to future growth, if the ability to service 
the higher level of debt were to become impaired.
  The only debts that show up 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 5.5 percent of total assets in 2005.
  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. Federal net liabilities, as reported in Table 13-
1, amounted 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 indicated by the long-run projections described in 
Part III.

                        Trends in National Wealth

  The net stock of wealth in the United States at the end of 2005 was 
$101 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 3.1 percent per year, which paralleled 
the slowdown in real GDP over this period. Since 1995 the rate of growth 
in U.S. real wealth has picked up. Net wealth has been growing at an 
average rate of 4.2 percent since 1995, about the same rate as from 1960 
to 1973. Productivity growth has also accelerated since 1995, following 
a similar slowdown from 1973 to 1995.
  The net stock of privately owned nonresidential plant and equipment 
accounts for about 27 percent of all privately owned physical assets. In 
real terms, it grew 3.3 percent per year on average from 1960 to 2005. 
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. Plant and equipment did not experience a more 
rapid rate of growth over the last ten years compared with 1973-1995. 
Private plant and equipment grew 3.0 percent per year on average between 
1973 and 1995 and at the same rate from 1995 through 2005. Privately 
owned residential structures and land have all grown much more rapidly 
in real value since

[[Page 197]]

1995 than from 1973 to 1995, while the stock of consumer durables has 
grown less rapidly.
  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 
only slightly 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 4.2 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 
4.0 percent per year since 1995.
  

                                     Table 13-5.  TRENDS IN NATIONAL WEALTH
                                        (Average annual rates in percent)
----------------------------------------------------------------------------------------------------------------
                                                                 1960-2005   1960-1973   1973-1995    1995-2005
----------------------------------------------------------------------------------------------------------------
Real GDP......................................................          3.4        4.3          2.8          3.4
National Wealth...............................................          3.7        4.5          3.1          4.2
Private Physical Wealth.......................................          3.6        3.9          2.7          5.0
  Nonresidential Plant and Equipment..........................          3.3        3.9          3.0          3.0
  Residential Structures......................................          3.7        4.1          3.1          4.9
Public Physical Wealth........................................          2.4        2.8          1.6          3.5
Net Education.................................................          4.6        5.8          4.1          4.2
Net R&D.......................................................          5.3        8.6          3.9          4.0
----------------------------------------------------------------------------------------------------------------

               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 13-6 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.
  The indicators shown in Table 13-6 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.

[[Page 198]]



                                                       TABLE 13-6.  ECONOMIC AND SOCIAL INDICATORS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                        Calendar Years                            1960      1970      1980      1990      1995      2000      2003      2004      2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
Living Standards:
  Real GDP per person (2000 dollars)..........................    13,840    18,392    22,666    28,429    30,128    34,759    35,456    36,590    37,560
    average annual percent change (5-year trend)..............       0.6       2.3       2.6       2.3       1.2       2.9       1.5       1.5       1.6
  Median Income:
    All Households (2004 dollars).............................       N/A    36,795    38,453    41,963    41,943    46,058    44,482    44,389       N/A
    Married Couple Families (2004 dollars)....................    31,742    44,302    50,245    55,910    57,927    64,825    63,955    63,630       N/A
    Female Householder, Husband Absent (2004 dollars).........    16,041    21,456    22,599    23,729    24,237    28,208    27,264    26,964       N/A
  Income Share of Lower 60% of All Households.................      31.8      32.3      31.2      29.3      28.0      27.3      26.9      26.8       N/A
  Poverty Rate (%) \1\........................................      22.2      12.6      13.0      13.5      13.8      11.3      12.5      12.7       N/A
 
Economic Security:
  Civilian Unemployment (%)...................................       5.5       4.9       7.1       5.5       5.6       4.0       6.0       5.5       5.1
  CPI-U (% Change)............................................       1.7       5.7      13.5       5.4       2.8       3.4       2.3       2.7       3.4
  Payroll Employment Increase Previous 12 Months (millions)...      -0.4      -0.4       0.3       0.3       2.2       1.9       0.1       2.2       2.0
  Managerial or Professional Jobs (% of civilian employment)..       N/A       N/A       N/A      29.2      32.0      33.8      34.8      34.9      34.7
 
Wealth Creation:
  Net National Saving Rate (% of GDP) \2\.....................      10.6       8.3       7.4       4.4       4.1       5.9       1.3       1.2       0.5
 
Innovation:
  Patents Issued to U.S. Residents (thousands) \3\............        42        51        42        56        68       104       106       101       N/A
  Multifactor Productivity (average 5 year percent change)....       0.8       0.8       0.8       0.6       0.7       1.1       N/A       N/A       N/A
  Nonfarm Output per Hour (average 5 year percent change).....       1.8       2.1       1.1       1.6       1.6       2.5       3.2       3.3       N/A
 
Environment:
  Air Quality:
    Nitrogen Oxide Emissions (thousands of tons)..............    18,163    26,883    27,079    25,529    24,956    22,598    20,728       N/A       N/A
    Sulfur Dioxide Emissions (thousands of tons)..............    22,268    31,218    25,925    23,076    18,619    16,347    15,943       N/A       N/A
    Carbon Monoxide (thousands of tons).......................       N/A   204,043   185,407   154,186   126,777   114,467   106,886       N/A       N/A
    Lead Emissions (thousands of tons)........................       N/A       221        74         5         4       N/A       N/A       N/A       N/A
  Water Quality:
    Population Served by Secondary Treatment or Better (mils).       N/A        85       N/A       162       174       179       N/A       N/A       N/A
 
Social:
  Families:
    Children Living with Mother Only (% of all children)......       9.2      11.6      18.6      21.6      24.0      22.3      23.2      23.2      23.2
  Safe Communities:
    Violent Crime Rate (per 100,000 population) \4\...........     160.0     364.0     597.0     729.6     684.5     506.5     475.8     465.5     463.2
    Murder Rate (per 100,000 population) \4\..................       5.1       7.8      10.2       9.4       8.2       5.5       5.7       5.5       5.6
    Murders (per 100,000 Persons Age 14 to 17)................       N/A       N/A       5.9       9.8      11.0       4.8       N/A       N/A       N/A
  Health:
    Infant Mortality (per 1000 Live Births) (e)...............      26.0      20.0      12.6       9.2       7.6       6.9       6.9       6.7       6.6
    Low Birthweight [>2,500 gms] Babies (%) \5\...............       7.7       7.9       6.8       7.0       7.3       7.6       7.9       8.1       N/A
    Life Expectancy at birth (years)..........................      69.7      70.8      73.7      75.4      75.8      77.0      77.6       N/A       N/A
    Cigarette Smokers (% population 18 and older) \6\.........       N/A      39.2      33.0      25.3      24.6      23.2      21.6      20.9      20.9
    Overweight (% population 20-74 with Body-Mass Index >2.5).      44.5      47.5      47.4      55.3      59.3      64.7       N/A       N/A       N/A
  Learning:
    High School Graduates (% of population 25 and older)......      44.6      55.2      68.6      77.6      81.7      84.1      84.6      85.2       N/A
    College Graduates (% of population 25 and older)..........       8.4      11.0      17.0      21.3      23.0      25.6      27.2      27.7       N/A
    National Assessment of Educational Progress \7\
      Reading 17-year olds....................................       N/A       N/A       285       290       288       287       286       285       N/A
      Mathematics 17-year olds................................       N/A       N/A       299       305       307       308       307       307       N/A
  Participation:
    Individual Charitable Giving per Capita (2000 dollars)....       277       390       423       484       458       701       654       661       N/A
 
(by presidential election year)...............................    (1960)    (1972)    (1980)    (1984)    (1988)    (1992)    (1996)    (2000)    (2004)
    Voting for President (% eligible population)..............        63        55        53        53        50        55        49        50        56
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
\2\ 2005 through Q3 only.
\3\ Preliminary data for 2004.
\4\ Not all crimes are reported, and the fraction that go unreported may have varied over time, preliminary data for 2005.
\5\ Data for 2004-2005 provisional, data for 2005 through June.
\6\ Smoking data for 2005 through June.
\7\ Data for some years are interpoated.

  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 toward some of 
the ultimate values that Government policy is intended to promote.

[[Page 199]]

  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 1960s. The 2001 recession had a negative 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 13-6 was preserved. Indeed, productivity growth, the best 
indicator of future changes in the standard of living accelerated. Since 
2000, it has increased faster than in any other five-year period since 
the 1960s.

        TECHNICAL NOTE: SOURCES OF DATA AND METHODS OF ESTIMATING

                      Long-Range Budget Projections

  The long-range budget projections are based on demographic and 
economic assumptions. A simplified model of the Federal budget, 
developed at OMB, is used to compute the budgetary implications of these 
assumptions.
   Demographic and Economic Assumptions: For the years 2006-2016, the 
assumptions are drawn from the Administration's economic projections 
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 2005 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 in 
the budget's economic assumptions.
    CPI inflation holds stable at 2.5 percent per year; the 
          unemployment rate is constant at 5.0 percent; and the yield on 
          10-year Treasury notes is steady at 5.6 percent.
    Real GDP per hour, a measure of productivity, 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 is only 0.2 
          percent at the end of the projection period in 2080.
    Real GDP growth declines over time because of the slowdown 
          in population growth and the increase in the population over 
          age 65, who supply less work effort than younger people do. 
          Historically, real GDP has grown at an average yearly rate of 
          3.4 percent. In these projections, average real GDP growth 
          eventually 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 2011, receipts and outlays 
follow the budget's policy projections, except that the projections do 
not include Social Security personal accounts. 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 spending grows 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 2005 Medicare trustees' 
report, adjusted for differences in the inflation rate and the growth 
rate in real 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

[[Page 200]]

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: The accrued 
liabilities for Federal retiree pensions and retiree health insurance 
along with the liability for Veterans disability compensation were 
derived 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 2005.
   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 2005 using 
investment data from the National Income and Product Accounts.
   Education Capital: The stock of education capital is computed by 
valuing the cost of replacing the total years of education embodied in 
the U.S. population 15 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 
minimum wage for high-school students and year-round, full-time earnings 
of 18-24 year olds for college students. These year-round earnings are 
reduced by 25 percent because students are usually out of school three 
months of the year. Yearly earnings by age and educational attainment 
are from 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. De

[[Page 201]]

partment 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 13-4 assume that basic research does not depreciate. 
BEA also assumed 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.